Economic and Real Estate Post Picks: Week of March 16, 2009

Post Recession Employment Trends: How long does it take for employment to recovery after a recession ends?

Cap Rate Closing/Asking Gap: The spread between asking and closing cap rates is widening.

Maturing Loans Are Coming Home to Roost: The looming problem of maturing income property loans with no exit strategy

Reflation: The risk of deflation has diminished.

Has the Economy Hit Bottom Yet? Probably not, but the rate of decline is slowing.

Economic and Real Estate Post Picks: Week of March 2, 2009

Price Stickiness and the CPI: The components of the CPI change at very different rates

A Long Recession Ahead?: The decline in household wealth could mean this recession will be a long one

Employment Decline, Recession, and Depression: A comparison of employment declines between this recession, 1981, and the Great Depression.

Credit Crunches and Small Business Finance: How small businesses are financed, and what happens in a crunch

Is the Pace of Layoffs Declining? Trend data from October, 2008 says maybe

Economic and Real Estate Post Picks: Week of February 16, 2009

Deflation Risk Down but not Out: The declining risk of deflation

Six Retailers that are Thriving: Some obvious (Wal-Mart), some not (Best Buy?)

Sales Tax Collections Plunging: Bad news for state and local governments

Is There a Treasury Bubble?: Lots of supply coming, but also lots of demand

Tracking the Household Balance Sheet: Income and debt flat, but net worth down substantially

CPI and Housing II

I previously posted on the fact that the housing component of the CPI is based on a rent calculation, and not home values.

I just came across an interesting graphic which demonstrates housing is by far the largest component of the CPI. Unfortunately, the description in the graphic of how the housing component  is calculated is vague. Here is the official BLS explanation.

This approach has come in for a lot of criticism. Here is a sample:

Financial Sense University: "The Complete and Utter Failure of Owners' Equivalent Rent"

The Mess That Greenspan Made: "How Owners' Equivalent Rent Duped the Fed"

My Budget 360: "Owners’ Equivalent of Rent: The Fed and BLS Gaming the System"

CPI and Housing

Econompic has some interesting charts on the latest CPI release. Here is a breakdown by major component:

How is it possible, you may wonder, that housing is up around 3% in the last year, during a period when home prices have experienced historic declines? The answer is the housing component of the CPI looks at rent value rather than ownership (there’s an excellent explanation on this Big Picture post).

Housing is the largest component of the CPI. Now that effective rents are falling, it’s very likely the CPI will continue to decline.

Will the Mortgage Crisis Lead to Higher Inflation?

The Big Picture has a post this morning suggesting cheap money and slack underwriting put renters into home ownership, and as these owners are foreclosed on they will be returning to rental status. The residential rental market is already fairly tight, and if this shift occurs here is the feedback cycle:

1) More rental demand equals higher rents.

2) Higher rents mean an increase in the CPI. Housing is by far the biggest component in the CPI, and the CPI calculation is based on rent levels, not house values. The CPI did not pick up the escalation in house prices because it focuses on rents and rent increases didn't keep pace with escalating house values. As rents increase the CPI will not pick up the falling house prices.

3) Higher inflation will put upward pressure on interest rates, exacerbating the housing crisis.

There's a scary feedback loop for you.

Ultimately, an equilibrium will be reached as investors buy foreclosed houses at prices which can be supported at market rent levels. That equilibrium is probably years away.