>Americans are now beginning to consume out of capital gains in earnest.
I believe it was you who said recently that you can't have a real bubble without a real estate bubble, and that the U.S. didn't have one of those. The more I hear, the more I disagree. The NYC residential real estate market has been insane for some time now, with 1-br apartments in formerly marginal neighborhoods of Brooklyn now going for $1,700/mo, thanks to young Wall Street thrusters with fat wallets. But it's happening elsewhere too. I was in Chicago last week, where the pace of gentrification looks incredibly rapid. Ditto San Francisco and Seattle. I was visiting my parents in the northern New Jersey suburbs yesterday, and the pace of new housebuilding there is fairly phenomenal. Add to this the LA Times story that Greg Nowell forwarded the other week saying that 15% of house downpayments in California are coming out of stock market gain. And finally this story that someone forwarded me yesterday. I don't think it's as relevant to overall housing inflation as the author seems to think, because the BLS is trying to measure average, not marginal, costs, but still...
Doug
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U.S. Economy Sun, 20 Jun 1999, 9:46pm EDT U.S. Economy: Housing Is More Expensive Than Government Says By Liz Enochs and Noam Neusner
U.S. Economy: Housing Is More Expensive Than Government Says
Washington, June 18 (Bloomberg) -- By the government's calculations, Tod Siegal should've had to spend only an extra $17 a month on rent when he moved from his apartment in Washington's upscale Dupont Circle neighborhood to another place nearby.
Sometimes, though, the government calculations don't measure up. The government's inflation figures suggest Siegal's monthly rent should've risen 2.1 percent to $817. Instead, finding a comparable place in Washington's hot apartment market meant Siegal had to pay an extra $225 per month, a 28 percent increase.
Siegal's experience highlights a divide between what the government says about U.S. housing costs and the sticker shock buyers and renters experience when they look for a new place to live. According to the Bureau of Labor Statistics, housing costs through the 12 months that ended in May rose 2.1 percent. Yet industry surveys indicate the figure is at least double that. In some areas, it's five times as high.
And that could mean there's more inflation in the economy than government figures indicate. ``We've had stratospheric gains'' in housing prices, said Diane Swonk, deputy chief economist at Bank One Corp. in Chicago. ``That's going to act as a push rather than a drag on inflation.''
It's not just major cities like Boston, New York and San Francisco that are seeing housing prices go through the roof. In Chicago and Minneapolis, rents rose 7 percent or more last year. Rents also rose in Atlanta, Charlotte and West Palm Beach, Florida, says M/PF Research Inc., a Dallas-based real estate consulting firm.
Higher prices come as a result of an economy now in its ninth year of expansion -- the second-longest for the U.S. on record -- and rapid job growth that has driven unemployment this year to a 29-year low.
Rat Race
Siegal, whose landlord wanted to move back into the apartment he was subleasing, found that he competed with many of the beneficiaries of this economy, such as people looking to move from smaller apartments to bigger ones and willing to pay for the privilege. He faced a rat-race of apartment-seekers, some of whom would apply for apartments sight-unseen. ``I'd show up to these open houses 45 minutes early, and there's already eight people waiting. By the time it starts, there's 25. As soon as the door opens, they start putting down applications,'' said Siegal.
He told one landlord he would take a place, but lost it to another bidder offering $200 a month more. Eventually, Siegal found an apartment, at $1,025 a month.
The Labor Department reports shelter costs in a category of the consumer price index that includes rent and lodging costs, as well as a calculation of what homeowners would pay if they were renting their houses. That homeowner category, called ``owner- equivalent rent,'' is used instead of a direct calculation of changes in home prices or mortgage costs. In all of 1998, shelter costs rose 3.3 percent, CPI statistics show.
Different Data
Yet the National Association of Realtors says housing prices -- not including lodging or rent -- rose 5.2 percent nationwide in 1998.
Meantime, U.S. apartment rents rose at a 4.9 percent pace in 1998, according to M/PF Research.
Why is there a discrepancy between the government's statistics and private sources? One reason may be that M/PF Research surveys only apartment complexes that have at least five units and doesn't include public housing, company president Ron Witten said.
Also, when the government measures housing costs, it counts price changes on a fixed group of apartments or houses over time -- whether or not the occupants move or sell.
In the government's report on inflation, ``there's the idea that there's one unit at a time and you're looking at the price change for that unit,'' said Frank Ptacek, the Labor Department's head of housing calculations for the consumer price index.
The housing market, however, consists of the smaller number of properties that change hands -- and that market has exploded. ``Almost uniformly, people are getting their asking price,'' said Astrid Adolfson, an economist at MCM MoneyWatch in New York.
Outstripping Incomes
Which means that people who move -- 43 million Americans each year, or 17 percent of the total population -- are particularly susceptible to rising housing prices.
At the same time, housing costs are rising faster than incomes. Non-farm compensation has been rising at about 2.2 percent during the past year. And that's making it difficult for some people who have to relocate. ``I'm struggling now,'' said J.W. Ford, a taxi driver who spent $770, or 10 percent more on rent per month when he moved to San Diego from San Francisco earlier this year. Before the move, he could sock away $50 or $100 a month in savings. ``Now I'm finding it difficult to even do that,'' he said.
Not that Ford's starving. As proof of the real estate market's strength, Ford was paid $29,000 to move out of his rent- controlled apartment in San Francisco by his landlord, who could easily get $1,800 a month for that apartment now, nearly three times what Ford was paying.
Costly Move to California
More often, however, renters are catching no such breaks.
When Jonathan Levy moved last year from New York to Palo Alto, California, he figured rents would be steep. But not this steep. The 31-year-old lawyer moved from a $600-a-month studio to a $950-a-month one-bedroom apartment in suburban Burlingame, California, near his office in Silicon Valley.
Even though his housing costs rose 58 percent, he got lucky, because most comparable apartments are even more expensive, he says. Levy says similar-sized units now rent for $1,400 a month.
So what does that tell him about government statistics that say he should be paying only $13 more a month? ``It's just another indication,'' he said, ``that you can't trust Uncle Sam.''