Interest for the Casual Rieder

Rick Rieder's observation holds more weight than most are willing to consider

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Summary

• Housing Market Dynamics: The disconnect between Owner’s Equivalent Rent (OER) and rental inflation metrics continues, with OER being influenced by household mobility patterns.

• Italianization of America: A momentary pause in the increasing trend of young adults living at home exacerbated housing market tightness and this in turn increases socio-spatial segregation due to rising rental prices, further impacting household mobility and employment opportunities.

• Labor Market and Credit Conditions: The COVID recession was unique due to government interventions that prevented a traditional credit cycle, but current trends show rising unemployment and delinquencies, with a potential worsening of credit conditions and increased risk of recession despite claims of easing financial conditions.

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The Main Event

After multiple weeks on the same topic, I wanted to hit on a few different subjects. Inflation of course remains one of them, but there are growing rumbles within both housing and credit that can’t be ignored.

Thoughts post-CPI:

While I’d consider the output “mixed” this past week on the CPI “meet” after the extended inflation commentary in “People Are Crazy”, there continues to be a puzzling disconnect in the timing of the OER decline relative to measures of rental inflation. This is a very good reminder that the effort the BLS puts into proper inflation measurement is admirable, even if it occasionally leads to confusing outcomes.

Remember that OER (owner’s equivalent rent) is a metric constructed bottoms up by the BLS using surveys of actual rentals to measure price change. As a result, individual household decisions (like moving or staying in place) can meaningfully affect the relationship between observed rents and OER. In the aftermath of the GFC, high levels of unemployment, disparate recoveries, and foreclosures meant that moving was relatively common. During the COVID pandemic, relocations were even more common. As a result, the match between new tenant rents and overall rents was quite different. Post-GFC, the closest match was roughly an 18-month periodicity. During COVID, this best fit fell to roughly 12 months. Post-rate hikes, this has expanded to what appears to be a nearly 26-month moving average.

For those who describe the housing markets as “frozen,” this is true, with far lower moving rates for BOTH renters and owners. As a result, “inflation” is proving stickier due to slower relocations that are slowing the incorporation of new, cheaper rents. Perhaps this is the new normal. Or perhaps rising delinquencies, evictions, and job loss will accelerate this pace. I am drawn to Neil Howe’s observation from the Fourth Turning that “crisis” always results in relocation (as an aside, Neil will be joining Harley and I for the July Keeping it Simple).

We don’t know the answer, but at least we are now aware of the problem. Fortunately, the government SHOULD be aware as well. This note from David Rosenberg was forwarded to me by way of Danielle DiMartino Booth:

The Italianization of America

One of the themes I’ve highlighted for well over a decade is the increased propensity for children to live at home as adults. The momentary reversal of this process following the drop in interest rates in Q4-2018 was a key contributor to the tightness in housing markets that drove prices stratospheric as COVID drove a hunt for more living space. There is a modest element of this chart that is misleading as within group aging has contributed as well, but a climb from 40% to 43% for this oversized group accounts for nearly 2MM of the total 3.6MM households formed from 2017 to 2021. The vast majority of that surge occurred 2020 to 2021.