Joey, there is however one interesting observation that goes against your optimism here.
The difference between cumulative rent increases on zillow etc al(up 25-30%) is much higher than the cumulative cpi shelter/rent (up 17%) since Feb 2020.
To me, this suggests that either the zillow index needs to fall(unlikely at <4% Unemployment) or cpi shelter still has room to run. What do you think? Is there another explanation?
I think we should discount the cumulative rent increases in Zillow given that the NTRR has already converged with CPI—if "catch up" was going to be substantial we would also see it in NTRR. Keep in mind there's also no rule that these should converge all the time—changes in vacancy rates, turnover, etc can cause the Zillow/NTRR to completely diverge from CPI, as we saw in 2008. I think the growth rates are most relevant here, and so I am optimistic the deceleration in Zillow/NTRR will be followed by a deceleration in CPI.
CPI: Shelter is mostly rent of primary residence and owner's equivalent rent.
But yes, entirely vacant units aren't counted in the NTRR/ATRR or CPI, but this is the point. If the composition of vacant units changes you can have a downstream change in NTRR. For an extreme example, imagine that the pandemic caused everyone to move out of New York and into the New Jersey suburbs in 2020—the NTRR would only be capturing rent changes in New Jersey, because there were no new leases signed in New York. Changes in vacancy rates and the composition of new leases can then cause the indices to diverge.
Thank you for the work. One quick question - you talk about how it is the growth rate of gross labor income that matters more than level, which makes sense. It also makes sense to me that NTRR would then lag the growth rate in gross labor income by a small margin on the way up as gross labor income has to rise at least coincidently with if not before new leases are signed at more expensive levels. But then that begs the question of why/how NTRR is already back to 0% year over year growth while gross labor income is sitting at ~6% year over year? Even in quarterly annualized terms, gross labor income growth is still positive ~4.5% while NTRR must be negative? Is there some component of the 2nd derivative of gross labor income that matters (deceleration of gross labor income growth from >12% to ~4.5% in qoq annualized terms)? Curious how you square that circle and explain how NTRR yoy% is already at 0% with gross labor income growth still reasonably positive.
Sorry for the delayed response, but I have two theories here, which I think it is a combination of.
The first is just that the Q1 2023 NTRR numbers are just too low thanks to methodological limitations and will probably be revised up. The first estimates are extremely high-volatility, and given that the Zillow data (which I think is the highest quality of the public data series) shows substantial positive growth, I think it's likely that New Tenant Rents are somewhere closer to "below pre-pandemic average growth" instead of "actively falling"
The second has to do with stimulus and household formation. If you look at the graph of NTRR growth versus GLI growth, there's one big divergence at the early pandemic, which I attribute to stimulus checks & enhanced unemployment allowing people to keep paying rent even as they lose their jobs plus the big surge in housing demand as households moved across the country or shifted their living patterns. Right now, we could be seeing the undoing of that—lack of stimulus and renormalization of household composition could be causing NTRR to temporarily fall below GLI growth.
Hey Nick! This is updated data from the researchers that they shared with me, but they have not made it public yet. They have plans to make it public in the near future, but if you want access now you should email them!
Thanks for the quick response. And good work going to the source and getting it from them. Bloomberg set up a ticker for it but I noticed that it hasn't been updated since the original paper came out.
When I look at CPI month over month in the months leading up to March 2020 I see inflation…it just never showed up in the YoY numbers because of the deflation in March, April, May 2020. That deflation also meant we would always have what looked like inflation in 2021 once those MoM numbers fell out of the YoY. We also had inflation in 2006 and 2007 that people seem to have forgotten about because of what happened in 2008.
Hi Joseph-Great data points and observations. Is there any data gathering that could track property taxes as a percentage of rent figures? These tax numbers are exploding, in particular, in Democrat run jurisdictions. Sort of the silent component of rent increases. Thanks and much continued success. Best regards, Matt
The best I can do is a 3-month cadence (NTRR is only released for each quarter because the monthly sample size is a little small). Please note that there are also seasonal adjustment issues (importantly, the ApartmentList data is not seasonally adjusted). Also, sorry but because I cannot embed an image in a substack comment I have to respond with a link here:
Joey, there is however one interesting observation that goes against your optimism here.
The difference between cumulative rent increases on zillow etc al(up 25-30%) is much higher than the cumulative cpi shelter/rent (up 17%) since Feb 2020.
To me, this suggests that either the zillow index needs to fall(unlikely at <4% Unemployment) or cpi shelter still has room to run. What do you think? Is there another explanation?
I think we should discount the cumulative rent increases in Zillow given that the NTRR has already converged with CPI—if "catch up" was going to be substantial we would also see it in NTRR. Keep in mind there's also no rule that these should converge all the time—changes in vacancy rates, turnover, etc can cause the Zillow/NTRR to completely diverge from CPI, as we saw in 2008. I think the growth rates are most relevant here, and so I am optimistic the deceleration in Zillow/NTRR will be followed by a deceleration in CPI.
I don't understand how vacancy rates cause divergence. Vacant units wouldn't be counted in any of the three indicators, right?
Also, I understand CPI shelter might not converge, but "rent of primary residence" should converge, right?
CPI: Shelter is mostly rent of primary residence and owner's equivalent rent.
But yes, entirely vacant units aren't counted in the NTRR/ATRR or CPI, but this is the point. If the composition of vacant units changes you can have a downstream change in NTRR. For an extreme example, imagine that the pandemic caused everyone to move out of New York and into the New Jersey suburbs in 2020—the NTRR would only be capturing rent changes in New Jersey, because there were no new leases signed in New York. Changes in vacancy rates and the composition of new leases can then cause the indices to diverge.
That makes sense. Thanks for the replies 😄
Of course! Happy to help
Thank you for the work. One quick question - you talk about how it is the growth rate of gross labor income that matters more than level, which makes sense. It also makes sense to me that NTRR would then lag the growth rate in gross labor income by a small margin on the way up as gross labor income has to rise at least coincidently with if not before new leases are signed at more expensive levels. But then that begs the question of why/how NTRR is already back to 0% year over year growth while gross labor income is sitting at ~6% year over year? Even in quarterly annualized terms, gross labor income growth is still positive ~4.5% while NTRR must be negative? Is there some component of the 2nd derivative of gross labor income that matters (deceleration of gross labor income growth from >12% to ~4.5% in qoq annualized terms)? Curious how you square that circle and explain how NTRR yoy% is already at 0% with gross labor income growth still reasonably positive.
Thanks in advance
Sorry for the delayed response, but I have two theories here, which I think it is a combination of.
The first is just that the Q1 2023 NTRR numbers are just too low thanks to methodological limitations and will probably be revised up. The first estimates are extremely high-volatility, and given that the Zillow data (which I think is the highest quality of the public data series) shows substantial positive growth, I think it's likely that New Tenant Rents are somewhere closer to "below pre-pandemic average growth" instead of "actively falling"
The second has to do with stimulus and household formation. If you look at the graph of NTRR growth versus GLI growth, there's one big divergence at the early pandemic, which I attribute to stimulus checks & enhanced unemployment allowing people to keep paying rent even as they lose their jobs plus the big surge in housing demand as households moved across the country or shifted their living patterns. Right now, we could be seeing the undoing of that—lack of stimulus and renormalization of household composition could be causing NTRR to temporarily fall below GLI growth.
Clear thinking and writing! Excellent! 🙏🏽
Glad you enjoyed Nick!!
Another terrific review of the ups and downs of our head-scratching economy Joseph. Thanks for all of your hard work.
Thanks Robert! Always thankful for your support and kind words
Excellent work and presentation. I appreciate your insight and intellectual honesty. Thank you.
Thank you SHW! Glad you enjoyed
Enjoyed and shared! :)
YES!!!! This is ABSOLUTELY what I wanted to hear. Thank you for putting in the effort to dig deeper down.
Thanks Vivian! So glad you enjoyed
Hi Joseph, is the NTRR data updated and published somewhere or are you recreating those indexes yourself? thanks!
Hey Nick! This is updated data from the researchers that they shared with me, but they have not made it public yet. They have plans to make it public in the near future, but if you want access now you should email them!
Thanks for the quick response. And good work going to the source and getting it from them. Bloomberg set up a ticker for it but I noticed that it hasn't been updated since the original paper came out.
When I look at CPI month over month in the months leading up to March 2020 I see inflation…it just never showed up in the YoY numbers because of the deflation in March, April, May 2020. That deflation also meant we would always have what looked like inflation in 2021 once those MoM numbers fell out of the YoY. We also had inflation in 2006 and 2007 that people seem to have forgotten about because of what happened in 2008.
Insightful stuff. Makes a lot of sense.
Thanks Erl!
Hey mate, I like your work. You down for a cross recommandation ?
Hi Joseph-Great data points and observations. Is there any data gathering that could track property taxes as a percentage of rent figures? These tax numbers are exploding, in particular, in Democrat run jurisdictions. Sort of the silent component of rent increases. Thanks and much continued success. Best regards, Matt
What does the third chart look like with a monthly cadence?
Hey Efithor!
The best I can do is a 3-month cadence (NTRR is only released for each quarter because the monthly sample size is a little small). Please note that there are also seasonal adjustment issues (importantly, the ApartmentList data is not seasonally adjusted). Also, sorry but because I cannot embed an image in a substack comment I have to respond with a link here:
https://imgur.com/zh99rt3