Thoughts on Housing and Price-to-Rent Ratio

Felix Salmon has an article on the NAR’s revised figures on existing homes sole from 2007 to 2010. He goes on to hypothesis why the housing market recovery will continue to be slow.

A few of his points are:

1. A very low mortgage rate means private sector will not lend – save for the government.
2. The low interest rate also means that quite a bit of existing home sales are driven by speculations.
3. An increase in mortgage rate (to normality) will mean that future homebuyers will have a more difficult time to buy homes.

These points are contentious and certainty subject to disagreement. But assuming everything he hypothesizes is true, then as speculation wanes – both speculators saddled with houses and existing homeowner with houses would try to sell their houses or rent them out. As Salmon points out, housing prices have a tendency to be sticky. In that case, I would expect to see more rentals, and thus the price to rent ratio to rise in the next few years.

Calculated Risk calculates the price to rent ratio from time to time (example here). This ratio has been declining for the past few years. However, the reason for the fall has likely been the fall in prices – whereas the rise in the future, assuming Salmon’s hypothesis is correct, will be due to the fall in rent.

Reference: Unreliable Housing Statistic Of The Day [Seeking Alpha]

Constant Maturity Yield Changes for Today (The Day after the Day after Yesterday)

This should be the last in a series of 3 posts. The constant maturity yields estimated by the Treasury Department (data here) today gain another 23 points at the 20-year and 30-year maturity. I assume the yields are driven by the event depicted in this article: EU Crisis Deal Buys Time for Greece: Papandreou.

Interestingly, the chart below shows that the yields on the Japanese Government Bonds head toward the opposite direction. (Data is here)  Sometimes, the discrepancy is due to the difference between the market close times for the US and Japan markets. But the change in yield has been negative for the past two days. Also, the change in yield is relatively small.

Reference: Bloomberg [Bloomberg]

Constant Maturity Yield Changes for Today (The Day after Yesterday)

Constant maturity yields estimated by the Treasury Department (data here) today recover 9 basis points at the 20-year and 30-year maturity.

The volatility in asset prices is why one should always take event studies with a grain of salt, and especially the choice in window size. A lot of papers on Quantitative Easing effects (my area of research) use event studies. A couple of examples include Gagnon, Raskin, Remache, and Sack (2011) and Swanson (2011).

Here are the headlines on Bloomberg’s main webpage at the moment (3:12pm October 26, 2011).

Banks: No EU Deal Yet on Greece
Supercommittee Dems Said to Pitch $3T Plan
U.S. Stocks Advance as EU Bank Agreement
UAW Members at Chrysler Ratify Labor Contract
Apple May Gain as VA Seeks Device Security
Bove: Goldman May Get ‘Windfall’ If It Buys MF
Stanford Proposes NYC Engineering Campus
Aflac’s Third-Quarter Profit Advances 7.8%
Trader Kupersmith Indicted for $60M Fraud

Reference: Bloomberg [Bloomberg];
  Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 41-59; 
  Eric T. Swanson, 2011. "Let’s twist again: a high-frequency event-study analysis of operation twist and its implications for QE2,"Working Paper Series 2011-08, Federal Reserve Bank of San Francisco.

Constant Maturity Yield Changes for Today

Constant maturity yields estimated by the Treasury Department (data here) felt 14 basis points at the 20-year and 30-year maturity.

Despite the description in the “About Me” box on the right side of the blog, I rarely talk about automation. The graph above is an example of the type of automation I do to help me keep tabs on the economy. My Linux computer runs a bash script everyday to get the constant maturity yield data from the Treasury Department website, and then the script uses Matlab to generate the graph. Finally, it emails me the graph by email. If the change in yield is large, the email adds the words “(LARGE MOVEMENT)” in the email subject.

Today, the yield changes are quite large. The numbers in the title of the graph are the day to day yield change. The top graph plots the yield curve for the past two days. The bottom graph plots the change in a bar graph. The email helps me keep tab on the economy – since large movement in the Treasury yields are usually meaningful. Of course, it is often difficult to pinpoint why.

However, for today at least, I am guessing the drop in yields is related to the Europe situation. Here are the headlines on Bloomberg’s main webpage at the moment (6:00pm October 25, 2011).

Asia Stocks Fall as Europe Uncertainty Grows
Japan Signals Coming Action as Yen Hits Record
Chinese Banks’ Profits May Not Lift Valuations
Amazon Profit Plunges; Shares Tumble
Australia Inflation Slows, Currency Declines
BlackRock Expects “Massive” Mining M&A
IBM Names Ginni Rometty as First Female CEO
Merkel Puts Rescue Fund to German Vote
S. Korea Growth May Slow, Pressuring BOK

Reference: Bloomberg [Bloomberg]