“The figures look even more striking in the San Francisco Bay Area, where it is possible to rent an $800,000 house for $2,000 a month. Making the same assumptions about rents and house prices, but also deducting tax relief on a fixed-rate mortgage and adding property taxes, a buyer would pay $120,000 more over seven years than if he had rented. House prices in San Francisco would need to rise by at least 4% a year (2% in real terms) for it to prove cheaper to buy a house. Since 1950 American house prices in real terms have risen by an annual average of just over 1%. To expect them to rise faster from their current dizzy heights smacks of irrational exuberance, to say the least.”

The Economist

At last, some more-or-less hard data about the extent of speculation in real estate:

“Collectively, investors and second-home buyers bought more than one of every three homes sold in last year’s record market, according to the NAR report.”

Real Estate News

The National Association of Realtors report, which is based on two surveys, found that “investors” - read “speculators” - accounted for 23 percent of 2004 home sale transactions, with second-home buyers taking an additional 13 percent of all sales transactions. Previous estimates had suggested that 8.5 percent of all 2004 sales transactions were investments. I substitute “speculators” for “investors” because I suspect that, in most cases, the rental income simply won’t support positive cash flows. Certainly what I see around here supports that view.

Since the (arguably depressed by speculative inventory) rental prices are used by the government to calculate the CPI - instead of actual house prices - the knock-on effect of this speculation has been to artificially depress the CPI.

The Economist has a good article on this subject:

“America’s core rate of consumer-price inflation (excluding the volatile prices of energy and food) rose by 2.3% in the year to January. But house prices rose by much more, 13%, in the year to the third quarter of 2004 (the latest official figures available). These are excluded from America’s consumer-price index (CPI); instead the cost of home ownership is represented by rents. But this can be misleading: over the past year, rents have risen by just over 2%, a lot less than house prices.

Ian Morris, an economist at HSBC, has devised a broader index, which includes house prices, giving them a weight of 30%, the same now attributed to the notional “rent” paid by homeowners in the core CPI. In the year to the third quarter, inflation as measured by this broad index was 4.9%, more than twice the rise in the core CPI. Assuming that house-price inflation has continued at the same pace, The Economist calculates that broad inflation is now 5.5%, the highest since 1982 (see chart). Moreover, during the past three decades the gap between the two measures of inflation has never been so wide for so long.

If inflation in America is really higher than the official index suggests, then interest rates should also be higher. Similar measures would show inflation well above the standard figures in many other countries too. The main exceptions are Japan and Germany, where house prices have been falling.”

Steering by a faulty compass

Looks like I didn’t miss anything. $53 crude, more dismal results from the semis and other tech companies, declining ISM numbers, rising bond yields, falling automobile sales, but the program-trading jam jobs continue. Just don’t be without a chair when the music stops. And it will.