In recent decades, the landscape of housing in metropolitan areas has witnessed a striking and consistent trend — the perpetual rise in rent and home purchase prices. This phenomenon prompts us to delve into the underlying causes, exploring who benefits, who suffers, and the factors contributing to this enduring surge in housing costs. A critical examination of the prevailing economic assumptions, such as the exclusion of housing purchase prices from the consumer price index (CPI), adds another layer to the understanding of this complex issue.
The Ascending Trajectory of Rent Prices
Across the United States, and especially residents of metropolitan areas are grappling with the harsh reality of escalating rent prices. This isn’t a fleeting issue; it’s a sustained trend that has persisted for several decades. The implications of this phenomenon are far-reaching, impacting the financial stability and well-being of individuals and families.
Economists’ Assumptions and the Consumer Price Index
“Previously, the inflation rate for owner-occupied homes was calculated based on actual spending by homeowners: the purchase price of the home, mortgage interest payments, property taxes, and so forth. In 1983, the BLS switched to a new method called owners’ equivalent rent. The agency started estimating how much the homeowner would have paid if they were renting their home from a hypothetical landlord.”Why the government took home prices out of its main inflation index
Economists often posit that a significant contributor to rising rent prices is the increasing preference for renting over homeownership among Americans. This assumption is reflected in the longstanding practice of excluding housing purchase prices from the Consumer Price Index (CPI), a primary measure of inflation. By omitting housing purchase prices, the CPI does not fully capture the financial strain caused by the housing market on average households. Even if the numbers came out to exactly the same, why change the measurement tools to an unnecessarily complex version of it? It raises the question of whether these data analysis economists are trying to hide something. Even if unintentional, they are certainly hiding something. What they are hiding, as always… is wealth.
Effects on Wealth Accumulation
Even if a person pays the same over the course of their life on rent as they would have on a mortgage, they are only buying themselves a temporary living situation by renting. Whereas if a person actually buys a house they are gaining an asset. That asset can be resold to recuperate some of the costs of purchasing the home. In fact, in recent decades, most home owners in the areas we are discussing end up having a much more valuable asset than what it was when they originally purchased it. It is possible that the real issue here is that there really isn’t a reliable and accurate measurement of true inflation.
The consumer price index is as the name describes, meant to outline changes in prices of consumer goods and services. It really is not an accurate way of measuring inflation in a general sense because it is intentionally focused on a specific sample of goods. It is by design not meant to capture all price increases, but rather how noticeable these price changes are to average people based on a package of things that are typically needed by average households. Yet, this is still the primary measure used by economists to describe an economy’s inflation rate. The fact that housing purchase prices are no longer included in the CPI is an example of a major malfunction in our society which wants to measure economic success by the ability of individuals to keep paying their bills every month, rather than considering how these individuals’ purchases now, impact their future wealth.
Renting is a ticket to permanent poverty. Most Americans know that it is a smarter financial investment for long term wealth accumulation to invest in purchasing a house rather than renting if they can afford to keep up the payments on their mortgage.
Phenomena Contributing to Rent and Housing Price Increases
What is happening now is that giant corporations or particularly credit worthy individuals are buying up housing because they know the asset price is going to continue to go up based on the fact that the fed has silently been upholding housing prices since 2008 by injecting money into banks that hold bad assets like poorly rated mortgage backed securities. This is done through what is called Quantitative easing.
Quantitative easing is the most literal form of money printing because it is entirely arbitrary. The traditional way of printing money is based on fractional reserve which requires lenders to have enough incoming deposits to justify lending out more money than they currently have on hand. With quantitative easing, the fed is simply deciding that for the sake of upholding the financial system, certain assets must be purchased from banks with money created out of thin air to keep banks’ balance sheets clean and allow them to keep lending thus keeping the economy moving. It may keep the economy moving, but to act like this unprecedented form of money printing is not contributing to inflation and subsequently asset appreciation is silly.
If the fed didn’t buy these bad assets it is argued that the economy would severely suffer as a whole since those banks ability to lend would be increasingly diminished and potentially removed all together if the bank goes under as barrowers from those securities fail to make their payments.
Smart real estate investors keep a close eye on the Fed’s actions regarding interest rates and QE. So their assets are appreciating usually at a similar or greater rate than they are paying in interest on these loans, and at the same time they are paying off the mortgage with the rent they are receiving from renters. Often times rent prices are higher than what the owner is paying in total every month for their mortgage interest included but the person with the mortgage is the one who gets to hold on to the value of the asset. Meaning that the renter is paying off a home for someone else to own.
Moreover, these companies and individuals buying up these properties for this business investment are taking homes off the market that would have otherwise been available for smaller buyers to get an opportunity to buy. Naturally when there are a lot of high dollar interests investing in a particular asset class, that asset class is going to appreciate at a greater rate than they would otherwise because there are more and more dollars chasing after (put simply) the same goods (In this case, assets). Some argue that this is counterbalanced by builders who build more homes to keep up with increasing demand by these investors, but they are not keeping up with demand and housing prices continue to soar as a general rule.
Who Benefits and Who Suffers
The question of who benefits and who suffers from escalating rent prices is pivotal in understanding the broader societal implications. On one hand, landlords and real estate investors stand to gain from increased rental income, potentially boosting their financial portfolios. On the flip side, renters, particularly those with modest incomes, bear the brunt of these rising costs. The struggle to secure affordable housing has become a widespread issue, affecting individuals and families across various demographic groups.
Policy Implications and Potential Solutions
The implications of soaring rent prices are not confined to individual households; they have broader societal and economic consequences. Policymakers are called upon to address this issue with measures that balance the interests of landlords and renters. Solutions might include initiatives to increase affordable housing stock, incentivize responsible property management, and explore alternative models that prioritize housing as a fundamental right. This may strike you as unorthodox given my broad criticisms of government intervention and spending in other posts, but in this case, the government is the cause of the problem and at this point they may be the only option when it comes to solving the issue.
We are in too deep to flip the status quo on its head. If we were to take the traditionally responsible actions of substantially increasing interest rates, reducing or desisting Quantitative Easing programs, and preventing predatory lending practices (the ones which created much of the issues that we are still dealing with in the aftermath of the 2008 housing crash), the economy would come to a standstill. This is a widely held belief among economists. So this is my singular non-contrarian point that I will make in favor of the contemporary economic “experts” who impact policy decisions.
At this point, if the Fed and the Federal government stopped intervening in economic affairs, the inevitable economic crisis that would ensue would be unimaginably destabilizing for both the long term prospects of our economy, and even the stability of our society as a whole. No one would be able to get dollars because realistically, most or all of the major banks would most likely be out of business overnight. This is why the Fed reluctantly justified policies like Quantitative Easing in the first place, because the entire financial system almost fell apart in 2008 as a result of widespread ownership of bad mortgages across the banking industry that left the banks with no available loanable funds or liquid assets to keep them afloat.
As we navigate the labyrinth of rising rent prices, it becomes evident that this is a multifaceted issue requiring comprehensive examination. Understanding the economic assumptions and policy implications is crucial for developing sustainable solutions. The ongoing conversation about the housing market’s impact on people’s lives is essential for shaping policies that create a fair and accessible housing landscape for all.
Post Script Point:
Most of the people involved in the policymaking decisions that contributed to the issues we now face in the housing/rental markets, still hold public or appointed office and are still leading authorities effecting ongoing decision making. Perhaps it is time to consider bucking the status quo and voting for other representatives who will put in new appointees. If we give new people without vested interests in the prominent policies of the past the opportunity to implement new solutions based on the lessons of their predecessors, we may be able to find a way out of this catastrophic economic situation that we’ve all allowed to happen by keeping the existing representatives in office. At this point, no experience looks better than a lot of experience given how massively mismanaged our financial system has been in recent decades.