Sunday, July 7, 2019

Housing: Part 354 - Nashville follow up

I wanted to revisit one graph, because I think it tells the story so well about what's happening in many US cities while lending standards are tight.

In the process, I realized that I should have adjusted for inflation, and in the process of doing that, I realized I had a minor excel worksheet error.  Here is the chart with the error fixed and the dollars constant.

In the last post, the linear trendlines were pretty nearly lined up.  But, the things that would affect the price/rent relationship should generally scale with inflation, so this is probably a more accurate portrayal of the Nashville market.  There has been some recovery of price/rent ratios in the low-to-mid part of the market.

At the top end of the market, P/R ratios are up about 5 points since the bottom, which was around 2011.  The bottom should be up at least that much too.

Low tier prices have risen as much or more than high tier prices.  But, as I pointed out in the previous post, this is because of low tier rent inflation, and the positive feedback of units with higher rents moving up to higher price/rent ratios.

That is still evident in this corrected graph.  At the high end, adjusted for inflation, price changes since 2011 are generally due to a recovery in price/rent levels.  That is the part of the market where building is taking place.

At the low end, little building is taking place, and rising prices are largely from rising rents.  Here, we can see that, even adjusted for inflation, the bulk of zip codes have moved from rents typically around $1,100 per month to rents more like $1,300.  P/R ratios in that part of the market have risen by around 2x and the rise in rents led to an additional P/R expansion of another 2x or so.  So, the low-to-mid part of the Nashville market moved from $1,100 rents at a P/R of 10x to $1,300 rents at a P/R of 14x.  The combination of those things was enough to cause those areas to appreciate in price faster than high end Nashville where rents have remained about the same in real dollars and P/R has increased by about 5x.

Some of the increase in rents is due to gentrification and in-fill capital improvements, but the tendency to blame those capital improvements for the increasing problem of unaffordable rent completely misses the point.  Rents won't come down until those segments of the market get as much capital as the top end is getting.  And, the top end is getting a lot.


  1. Interesting. How does filtering down interact with the differences you see between high and low end?

    I guess filtering down happens at longer time scales than what would be relevant here?

    1. Yes. I think there is some of that going on. Temporary frictions. On the other hand, even with filtering, landlord markets will have a higher rent/price ratio, so even if this becomes the new norm, families may slowly revert to ling term rent/income norms but they will be in smaller units, so the units will still show some residual permanent increase in rents. Also some of this is probably a compositional shift from gentrification where existing low tier units are replaced with high tier units that fetch a higher price.

  2. I wonder if it is worthwhile to assemble job or payrolls data by region against housing starts....

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