Monday, June 21, 2021

More on Interest Rates and Home Prices

Some follow-up thoughts on yesterday's post.

There might be some more to think about regarding interest rate sensitivity and local supply constraints.  I asserted yesterday that the decline in yields from 2000 to 2005 was concentrated among the more expensive cities, but that yields remained relatively stable in other cities during that time.  One implication is that expensive cities may be more rate sensitive.  I am unusually flummoxed by the patterns here for some reason.  But, digging around some more, I think I have become less sure of my intuition about sensitivity to interest rates and about relative housing yields across metros.

This first chart suggests the reason for expecting more yield volatility in expensive cities and possibly more sensitivity to interest rates.  Clearly, over time, high rents have become an increasingly important factor in housing markets.  Systematically, where rents are higher, gross yields are lower.  And, where rents are low, yields seem to remain relatively stable over time. The relationship between rent levels and yields moves up and down through hot and cold markets.  In other words, a bit counterintuitively, where rents rise, the rent/price ratio declines and becomes more volatile.

Data from Zillow.com affordability measures
But, when I look more closely at cyclical changes, I just don't see the pattern that this suggests there should be.  During the 2000-2005 boom, the Closed Access cities and the Contagion cities experienced anomalous declines in gross yields.  Long term interest rates also declined during that time, but I think the decline in yields in those markets was a result almost purely of these anomalies.  In the Closed Access cities, the anomaly was mostly continued strong rent inflation, and in the Contagion cities, it was from short-term price surges having to do with big shifts in migration that stressed their local markets.  Taking the Closed Access and Contagion cities out of the mix, in the rest of the country, if anything, housing in cities with higher yields was somewhat more sensitive to changing interest rates than housing in cities with lower yields.

As housing has moved through the aftershocks of the boom and the crisis, this seems to continue to be the case.  Once those anomalies from 2002-2006 worked their way out of the system, housing seems to be only somewhat sensitive to long term rates, and it is more sensitive to rates where housing is less expensive.

Zillow has detailed rent data going back to 2014.  Looking very broadly at the numbers up to 2014, gross rent/price was in the same range that it had been in the 1990s, and that this was more or less the case across MSAs.  Over that time, 30 year TIPS rates had declined from about 3.5-4% to around 1%.  One could suppose that this is because housing yields are not rate sensitive or because shifts to very tight lending had added a premium to housing yields, counteracting the change in TIPS rates.

I'm working very broadly here, but it appears that there could be three general forces at work here. (1) expected rent inflation, (2) long-term real rates, (3) tight lending since 2007.

In "Shut Out", being a little more thorough, I suggested that expected rent inflation could explain differences in home prices across cities, plus about a 20% price increase due to declining rates. Rates have declined about that much again, since the boom.  These two factors may be correlated, because if low rates trigger more home buying demand, that should lower rents where supply is elastic and raise rents where supply is inelastic.  It's complicated.

From 2014 to about September 2019, housing yields appear to have declined the most in metros with higher yields.  This changed after September 2019, and maybe this has mostly been due to Covid issues, but since then, yields have declined across the board.  I suspect that part of what is going on is that there has been a temporary decline in rents in the expensive, low yield cities, which has temporarily lowered their yields.  As those rents recover, yields in those cities will move back up.  So, it appears that there is a systematic change since 2014 of yield compression.  Yields in low-yield cities are staying about the same and yields in high-yield cities are declining.

In any case, there is a striking difference between this recent move in home prices and the 2000-2005 move.  There are no anomalous cities here.  The changes in yields are relatively similar across cities, and, apparently, correlated with existing yields.

This shift could reflect at least three factors:

1) Unsustainable bubble activity.  This is always a popular choice.  I am skeptical, of course, because in general the whole existence of this project of mine owes itself to discovering evidence, time after time, that has contradicted these types of explanations.  Also, as with so much housing data, the difference between cities dwarfs the changes within them.  Should we call a decline from a 10% yield to a 8% yield a bubble when the country is full of cities with 6% yields?  This would call for tight monetary and/or lending policies.  Of course, I think that is likely the continuation of a wrong perception that has been knee-capping our economy for 15 years now.

2) Maybe prices in high-yield markets are more sensitive to interest rates.  In that case, rising rates (if they ever come) might be associated with declining prices.  I don't see much sign of loosening lending standards.  Most of the activity is still among those with high credit scores.  If that is the case, loosening regulations on mortgage lending could be a useful countermeasure to help keep prices from collapsing if prices are sensitive to rising interest rates.

3) Maybe the convergence in yields is happening because all cities are becoming supply-deprived.  In that case, strong growth and generous lending will be key.  Why might this be the case?  Building has been much lower in affordable, high-yield cities since 2005.  In this chart, there are a few outliers well below the regression line.  Those are Contagion cities who were especially walloped by the financial crisis (Phoenix, Las Vegas, Orlando, etc.).  Other cities have a quite high correlation.  Building has been low in affordable cities.  I attribute this to tight lending.  These cities tend to have lower incomes.  And, because of this, rents have been rising broadly across MSAs.  Recently, rents have moderated or fallen in the low-yield cities because of Covid migration.  In any case, less building could mean that buyers in all metros expect rents to be strong.  This can be seen in vacancy rates, too.  Vacancy rates have always been low in the low-yield cities.  Vacancies in other cities are declining too, because of the lack of building.

https://fred.stlouisfed.org/graph/?g=EU8h

Of course, I would expect some combination of 2 & 3.  Surely there is some sensitivity to real long-term interest rates.  The questions are how sensitive home prices are to interest rates, how that sensitivity might differ across cities with different supply elasticities, and how much tight lending standards may have altered that sensitivity.

I thought there might be more anomalous movement among MSAs in the recent market activity.  Austin, for instance, might have seen an unsustainable decline in yields, as the Contagion cities had before 2006, because of a big migration shift.  I suspect that tight lending plays a role here.  In 2003-2005, migration led to more building.  And, possibly the migration was more targeted at certain cities than it is today.  But, because entry level housing is greatly obstructed by tight lending (and because of supply chain issues related to Covid), there hasn't been as much of a supply response in these markets recently.  So, rents have been rising in cities that tend to take in more migration in recent years.  Migration is pushing up prices, but more so than in 2005, it is pushing up rents, so the Contagion cities aren't anomalies in terms of yield.  And, since the migration is related to lower demand for Closed Access residency, the Closed Access cities are experiencing some anomalous decline in yields, but this is coming more from declining rents than from rising prices, and will likely reverse or moderate as Covid passes.

26 comments:

  1. Great stuff. Like my late great Uncle Jerry said, "If you are not confused...then maybe you do not understand the situation."

    https://www.zillow.com/los-angeles-county-ca/home-values/

    Average house price in LA County, $756,963. This average includes only the middle tier of homes, says Zillow. Prices have doubled since 2013, by this metric.

    Macroeconomists are trained to think in large-scale theories---interest rates go up, asset values go down. But maybe the US residential property market, like so many markets, is a collection of structural impediments and idiosyncrasies.

    As I like to say about international "free trade." The dog is usually thought of as free trade, and tail is the structural impediments, less important. But what if it is really the other way around: Structural impediments and non-free-market forces define global trade, and free trade is the (rather small) tail?

    However, on housing I agree with you. The more the better. Literally, anywhere on the West Coast, build it and they will come.


    ReplyDelete
    Replies
    1. Hello! I’m very excited to inform everyone that I’m completely cured from HSV1&2. I have used Oregano oil, Coconut oil, Acyclovir, Valacyclovir, Famciclovir, and some other products and it really help during my outbreaks but I totally got cured from HSV1&2 with a strong and active herbal medicine i ordered from a herbalist and it completely fought the virus from my nervous system and I tested Negative after 14 days of using the herbal medicine. I’m here to let y’all know that herpes1&2 virus has a complete cure, I got rid of mine using Dr Osato herbal medicine. Contact him via email: osatoherbalcure@gmail.com or WhatsApp him at +2347051705853 to get yours and be cured from HSV1&2, HPV, HIV, HERPES completely. His website is osatoherbalcure.wordpress.com

      Delete
    2. Finally there is a cure for herpes1&2 and Dr Osato herbal medicine is the cure for herpes1&2. I saw a post in a health forum from miss cherlyn solie on how she was cured from herpes with the use of Dr Osato herbs and she also wrote Dr Osato cure all kind of deadly diseases and virus including Herpes, HIV, ALS, HPV, HSV1&2, MND, Epilepsy, Leukemia, Asthma, Cancer, Diabetes. At first i doubted if it was real but decided to give it a try because i was desperate to get cured from herpes and i contacted this herbal Doctor on email she provided on the comment and explain my problem to him and he told me that he is going to prepare a herbal medicine for me which he did and he sent it to me through UPS service, when i receive this herbal medicine, he gave me instructions on how to use it, after taken the medicine as instructed, i went for check up and the result was Negative and i went to two other clinic to retested and the result was still Negative and all the symptoms of herpes where gone from my body and my doctor confirm with me that am free from herpes , I am now free from Herpes. You can contact Dr Osato on his email: OSATOHERBALCURE@GMAIL.COM or you can call and Whatsapp him on +2347051705853 . His website is https://osatoherbalcure.wordpress.com. All thanks to Dr Osato for what he has just done for me and i will continue to share this great testimony on every platform so we can join hands to eradicate these diseases and viruses out of this world.


      Delete
  2. Hello! I’m very excited to inform everyone that I’m completely cured from HSV1&2. I have used Oregano oil, Coconut oil, Acyclovir, Valacyclovir, Famciclovir, and some other products and it really help during my outbreaks but I totally got cured from HSV1&2 with a strong and active herbal medicine i ordered from a herbalist and it completely fought the virus from my nervous system and I tested Negative after 14 days of using the herbal medicine. I’m here to let y’all know that herpes1&2 virus has a complete cure, I got rid of mine using Dr Osato herbal medicine. Contact him via email: osatoherbalcure@gmail.com or WhatsApp him at +2347051705853 to get yours and be cured from HSV1&2, HPV, HIV, HERPES completely. His website is osatoherbalcure.wordpress.com

    ReplyDelete
  3. Get the best of herbal medicine from Dr. onyeneke a traditional herbalist he cured me from herpes virus that I have been suffering from for the past two years now he is perfect in curing unimaginable diseases and virus with his natural roots and herbs contact him today via email on dronyenekeherbs@gmail.com or whatsapp him on +2348123354514 here are few of illness I can list
    1.. Herpes
    2.. Diabetes
    3.. Cancer
    4.. Thyriod
    5..Hsv1&2
    6.. PCOS
    7..grave disease
    8..thyriod CANCER
    9..IBS
    10..Lupus
    11..GBS/CIDP
    12..Syphilis. ETC

    ReplyDelete
  4. I was a HIV-AIDS patient and I got it from cheating on my wife. It was sort of a payback but a week later I was told by a friend that the person who I cheated with had the HIV-AIDS virus and did not tell me. I was so stupid by not using a condom I thought since he was an old school friend he was trustworthy. But I was wrong. I cried and cried. Two days later, I got a phone call from my friend and he told me about a person who is known by another friend, who can help me. I could not let my wife know what I was going through. I finally got his email address: oseremenspelltemple@gmail.com and I emailed this man my story and he replied me immediately saying i should be calm and told me that everything will be OK. I could not come to terms with what I was hearing but then I concluded it did not matter because I was so broken I just needed help. I was going out of my mind literally. I was confused with what he was telling me, but I listened. He told me about some materials i need to buy that he needed to cast the spell and I said OK. I bought the materials to him, I sent down my picture to him and my positive result sheet and he replied me that i am going to be negative under 3days. I message Him every 2hours for 2day and I knew he thought that I was crazy but I did care I needed a shoulder. Behold, the third day he messaged me i should go for a test that i will be negative. My marriage could be broken because of a stupid mistake and my life was on the line. I remembered when I was going to get the results of my re-test I called him up again and told him that I was going to get my results today and his reply was “so" and that everything will be as he explained. I knew then that he was getting tired of me calling him, maybe I was wrong. Well I got my results and the first person I called was him - again. As he said hello I started to cry and cry. I could not believe it. I was given a second chance in life.This man is a great spiritual HIV/AIDS healer, his healing spell on aids healing is very powerful .please brothers and sister, contact Dr Ose oseremenspelltemple@gmail.com
    whatsapp +2348136482342www.facebook.com/Dr-odion-spell-temple-110513923938220

    ReplyDelete
  5. Finally there is a cure for herpes1&2 and Dr Osato herbal medicine is the cure for herpes1&2. I saw a post in a health forum from miss cherlyn solie on how she was cured from herpes with the use of Dr Osato herbs and she also wrote Dr Osato cure all kind of deadly diseases and virus including Herpes, HIV, ALS, HPV, HSV1&2, MND, Epilepsy, Leukemia, Asthma, Cancer, Diabetes. At first i doubted if it was real but decided to give it a try because i was desperate to get cured from herpes and i contacted this herbal Doctor on email she provided on the comment and explain my problem to him and he told me that he is going to prepare a herbal medicine for me which he did and he sent it to me through UPS service, when i receive this herbal medicine, he gave me instructions on how to use it, after taken the medicine as instructed, i went for check up and the result was Negative and i went to two other clinic to retested and the result was still Negative and all the symptoms of herpes where gone from my body and my doctor confirm with me that am free from herpes , I am now free from Herpes. You can contact Dr Osato on his email: OSATOHERBALCURE@GMAIL.COM or you can call and Whatsapp him on +2347051705853 . His website is https://osatoherbalcure.wordpress.com. All thanks to Dr Osato for what he has just done for me and i will continue to share this great testimony on every platform so we can join hands to eradicate these diseases and viruses out of this world.


    ReplyDelete
  6. Thanks to God and also to Dr. OBINA, the great herbal man that cured me from HERPES. I contacted the virus from my partner three years ago, i almost spent all i had because i was restless and i need to get rid of the virus and i did not rest until i saw people testimony about Dr. OBINA recommendation online for how he has being curing HERPES with his herbs and i emailed him and tell him my problem and he prepare my cure and send it to me and gave me instructions on how to use the herbs and behold after i finish drinking it i went to the hospital for checkup and the result was negative and the virus was completely gone from my body. You can contact Dr. OBINA to get your herbs too and cure yourself from these virus. His Email: obinnaspelltemple@yahoo.com or add him on WhatsApp +19492293867 Dr. OBINA has cure so many different type of diseases with his herbs such as HERPES, HIV/AIDS. CANCER of all kinds, HSV 1&2, DIABETES and so many more. I want to thank God for using Dr. OBINA to cure me from herpes. Dr. OBINA is truly gifted by God. add him on WhatsApp +19492293867

    ReplyDelete

  7. Nothing can compare the joy in my heart for being free from this terrible disease Herpes, for a long time i suffer from it not until i saw a review on how Dr Onuwa someone from Herpes. I contact him and bought his herbal medicine, surprisingly for me i was cured.no problem that Dr.ONUWA can’t solve. HIS MAIL ADDRESS____ DRONUWA2@gmail.com or whatsapp +2348115914591 cure and also beware of scams Good Luck He cure listed diseases CANCER HEPATITIS A AND B DIABETIC. HIV

    ReplyDelete
  8. There is a great herbal man called Dr voodoo who can cure Hepatitis B virus and other deadly diseases with the use of natural herbs to cure Hepatitis B virus problems. He is from Africa and he is a great doctor and he can also cure you as well if you are have the problem And other deadly disease and here is email address voodoospelltemple66@gmail.com or Whatsapp +2348140120719 HERPES CURE,CANCER CURE,HIV/AIDS CURE,HPV CURE

    ReplyDelete
  9. Generally speaking, women would want to look lovely and eye-catching always. This is one reason why even the eyelashes can now be improved by way of making use of eyelash lengtheners. These are goods that may help any women attain fuller, thicker and lengthier eyelashes that could absolutely capture anybody’s attention. These items have been guaranteed safe, efficient and inexpensive provided that the suitable product is picked and bought. home devaluation

    ReplyDelete
  10. This is really a nice and informative, containing all information and also has a great impact on reader. Also, we provide support for SBC Yahoo Login. If you're incapable of log into SBCGlobal email through Yahoo official page then, read the process distributed by our experts. We assure you that the info present on our website is obviously optimal. To have touching experts you are able to contact us. SBCYahooLogin


    ReplyDelete
  11. We have always been at the service of students at best paper help when it comes to assisting them with research papers, essays, and any other projects they require. You can get exceptional, on point, and assist students in achieving the highest possible grades in class. Our paper helper is unrivaled, and we can assure you that you will receive fantastic grades. Having paper help makes school life easier and more manageable because quality assignments can be delivered on time, resulting in great grades. It's quite OK to seek the best paper help; in fact, you should do so whenever possible because the paper helper will save you time and help you flourish.

    ReplyDelete
  12. Thanks for sharing this nice blog. And thanks for the information.
    FÜHRERSCHEIN ONLINE KAUFEN

    ReplyDelete
  13. Divine Soft Technology is a professional online reputation management company in India. We restore and protect your brand and corporate reputation with best ORM services.

    ReplyDelete
  14. Reading this kind of page is enjoyable! I appreciate how insightful and practical this is for me and the other readers. You explain this post. More on Interest Rates and Home Prices. For my tasks, specifically searching for the greatest online dissertation help uk services, I used to routinely use online resources. I suggest that all students use this website. I appreciate you showing us this website.

    ReplyDelete
  15. what a fabulous year for you & marv!!! seems like you’ve been everywhere in the world and online! =) you’re amazing~ how do you have the energy/time to blog/twitter/fb so much?! i can barely even keep up one little blog without any fbing or twittering. there are so many new posts on your blog i can’t even find the skype one~ lol!Alexandria apartments

    ReplyDelete
  16. Melody, I have become completely obsessed with your gorgeous work! And this desk is no exception. Can you tell me if you are able to apply the ASCP directly over the old finish without sanding or stripping (assuming no scratches or damage in the wood)??

    Soft Close Cabinet Hinges

    ReplyDelete
  17. Thanks for the detailed info on this topic. It’s very hard to find nowadays to know about the basics but you did it so much well and I loved it . Now it's time to avail Limo service West Palm Beach for more information.

    ReplyDelete
  18. Beautifully narrated the issues associated home prices and rentals. Thanks for bringing this article for to bring some awareness. Keep sharing this kind of informative article useful to the readers. Halifax DUI VA

    ReplyDelete
  19. Incorporate water elements such as fountains, ponds, or cascading waterfalls to add a soothing auditory and visual experience. Water features not only enhance the overall aesthetics but also attract birds and other wildlife, enriching the ecosystem of your garden.roof estimate usa

    ReplyDelete
  20. Great Post
    CVWritingServices.ie is Ireland's premier provider of CV writing services. Our team of professional writers specializes in crafting high-quality Irish CVs that make a lasting impression. We understand the unique requirements of the Irish job market and tailor your CV accordingly, incorporating industry-specific keywords and phrases. Let us help you create a powerful Irish CV that highlights your qualifications and maximizes your job prospects in Ireland.

    ReplyDelete
  21. Picture frames evolved to reflect changing artistic and design movements. The Renaissance period saw frames becoming more restrained, with a focus on harmonizing the frame with the artwork. In contrast, the Baroque and Rococo eras embraced extravagant and flamboyant frames that emphasized opulence and grandeur.Architectural Moulding

    ReplyDelete