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CPI Data from the Twilight Zone


Bureau of Labor Statistics data doesn't reflect reality.


Rents Falling Everywhere

Given that the official measure of Consumer Price Index (CPI) is based on rents not housing prices, consider the following links courtesy of Lanser on Real Estate: Really? Rents fall almost everywhere.

Falling Rents in Puget Sound

Over the weekend, several people sent me a link about rents in the Seattle area: Apartment rents falling in Puget Sound area.

A shrinking number of jobs and a growing supply of apartments will continue to push the Puget Sound region's rents down next year as vacancy rates climb, industry experts predict.

"Job losses killed our market, and development buried it," Mike Scott, of Dupre + Scott Apartment Advisors, told landlords at an industry conference Tuesday.

The average monthly rent across all apartment types in King, Pierce, and Snohomish counties fell from $988 to $959 during the 12 months ending in September, and a continuing decline through 2011 will further cut that figure to $889, Dupre + Scott projects.

While demand for apartments is falling, the supply is rising.

So far, 4,100 new units have opened this year, and more than 2,000 others are expected to become available by year-end, according to Dupre + Scott.

The firm estimates that about 20% of the 6,000 condos completed in the past three years are also on the rental market now.

The combination of job losses and new units has upped the region's vacancy rates from 6.6% last spring to 7.2% now, and heading toward 9% next year, the firm said.

To attract renters, landlords have lowered rents, and six out of 10 are offering concessions worth an average $757, according to the firm's research.

New York City Landlord Chimes In

On August 27, I received an email from a New York City landlord about falling rents and concessions. Below is a snip from his letter:

I'm a landlord here in NYC (as well as an avid reader of your blog) and I actually feel the 7% to 10% drop mentioned in the article understates the case somewhat. Based on what I'm experiencing, I'd say that rents are down 10% to perhaps as high as 20% from their peaks.

Twilight Zone Statistics

With home prices crashing year-over-year and both housing rents and apartment rents dropping, one might think that falling rents would be reflected in the CPI.

Inquiring minds are investigating 2009 BLS CPI Data to see if theory matches reality.

In what should be no surprise, the Bureau of Labor Statistics isn't in the ballpark. Here are some numbers and a chart:

  • CPI data for September 2009: The rent index was unchanged and the index for owners' equivalent rent (OER) increased 0.1%.

  • CPI data for August 2009: The rent index was unchanged and the index for owners' equivalent rent increased 0.1%.

  • CPI data for July 2009: The indexes for rent and owners' equivalent rent were unchanged.

CPI Data for First Half 2009:

Click to enlarge

Unbelievable Statistics

  • The Bureau of Labor Statistics is reporting that rent from the first half of 2009 is up 3.1% from the first half of 2008.

  • The BLS is reporting that owners' equivalent rent from the first half of 2009 is up 2.1% from the first half of 2008.

Effect on the CPI

Inquiring minds are reading Consumer Price Indexes for Rent and Rental Equivalence.

Rent of primary residence (rent) and owners' equivalent rent of primary residence (rental equivalence) are the two main shelter components of the CPI.

Rental equivalence. This approach measures the change in the price of the shelter services provided by owner-occupied housing. Rental equivalence measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market.

Relative Importance of Shelter Components in the CPI

Note that OER is the single largest component of the CPI at 23.83%. OER plus rent of primary residence is a whopping 29.96% of the CPI.

With home prices crashing, a massive inventory of unsold homes, and a massive shadow inventory of unsold homes on top of that, does anyone think that rental prices of homes is rising?

Bear in mind that everyone but the BLS seems to know that rent prices are dropping like a rock.

Not the First BLS Error

This isn't the first major error by the Bureau of Labor Statistics. I've been harping for two straight years that a massive revision in jobs was coming because of a fatally flawed Birth/Death Model.

Last Friday, the Bureau of Labor Statistics announced it would revise the number of jobs lost during the recession by a whopping 824,000. (See Preparing for Huge Downward Revision in Job Numbers)

Most were shocked by this announcement. The only shock to me is how low the number is. Look for an upward revision (or for the Bureau to smooth the number over time).

Effect on the CPI

Rents of primary residence are clearly falling and owners' equivalent rent should be falling as well. Given that owners' equivalent rent and rent make up 29.96% of the CPI, the year-over-year CPI is massively overstated at -1.5%.

The BLS is once again in the twilight zone.

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