Inflation & Condo Conversions: Good Combo

A: An interesting topic as there is a new trend nationwide that could eventually help drive DOWN inflation, and specifically the CPI #! The trend of existing unsold condos converting to rentals nationwide is helping to add to the supply of rentals on the market (mostly outside Manhattan), which is expected to help ease inflationary pressures in the CPI number. The reason, is that apartment rental costs are a key component to the CPI # and as rental costs fall so does the inflationary pressure on the overall number. Today's CPI # came in at expectations as the very important Core CPI yr-over-yr dropped to 2.3%; a sign that the fed's hold policy is working and inflationary pressures seem to be moderating.



First, lets pass on to you what today's very important economic data told us and then Ill discuss in more detail how condo conversions will help ease inflation down the road.

According to CNN Money:

Prices rose a bit less than forecast in April, according to the government's key inflation report Tuesday, but a closely watched reading showed a pick-up in prices outside of food and energy.

The Consumer Price Index showed prices at the retail level rose 0.4 percent in the month, compared with the 0.5 percent rise in March. Economists surveyed by Briefing.com had forecast a 0.6 percent increase in the CPI.

The more closely watched core CPI, which strips out the volatile prices of food and energy, rose 0.2 percent, after edging up only 0.1 percent in March. The reading was in line with economists' forecasts.

Contributing to the tame CPI number were falling prices for airline tickets, clothing/apparel and tobacco products.

According to Yahoo Finance:

Through the first four months of this year, consumer inflation is rising at an annual rate of 4.8 percent, almost double the 2.5 percent increase for all of 2006. The acceleration has occurred in large part because of higher costs for food and energy.

However, excluding energy and food, core inflation is up at an annual rate of just 2.2 percent through April, an improvement from the 2.6 percent rise in core prices for all of 2006.

That improvement is certain to be welcomed at the Federal Reserve, where policymakers are hoping that their campaign to restrain inflationary pressures is beginning to show results.

Expect stocks to remain strong as long as the Fed has less reason to hike interest rates. Moving forward, there is another trend that I think will help ease consumer price inflation; CONDO CONVERSIONS TO RENTALS!

It's very important to note that this trend is mostly true for markets outside of Manhattan real estate, where inventory is not so much of a problem and therefore won't be included in this theory.

To understand this theory we must first understand what makes up the Consumer Price Index (CPI) and why it is such a closely watched dataset by the Fed for inflation monitoring.

According to Wikipedia:

SOURCES OF CPI DATA

Prices for the goods and services used to calculate the CPI are collected in 87 urban areas throughout the country and from approximately 23,000 retail and service establishments. Data on rents are collected from about 50,000 landlords and tenants.

So, rental prices are considered a good portion of the CPI data used to monitor inflation. This is important because with nationwide housing inventory at very high levels contributing to the weak housing market outside of New York City, there is a growing trend of converting condo inventory into rentals to:

a) avoid taking a loss on the property via selling
b) help ease overall inventory
c) take advantage of high rental prices

As this trend continues, I would expect rental inventory to grow as we head into the end of 2007 and into 2008 causing the supply/demand imbalance to shift in favor of renters, finally! Again this is mostly true for outside of Manhattan. In Manhattan, there are a lot of new development units set to come to market but thus far there are no major inventory issues to speak of. As long as this doesn't change, the # of unsold new condos that convert to rentals should stay at normal levels.

As rental inventory increases across the rest of the nation prices should ease, helping to further moderate the CPI data that eventually comes out! The chain of events that ends with moderating inflation is already underway. We already have high inventory of unsold condos with reports like...

Housing is Going to Get Worse (Miami Herald, FL)

Making It Appealing (Myrtle Beach, SC)

Downtown Condo Sales Down 46% in First Quarter (Crain's Chicago Business, IL)

Washington, DC: Big Condo Supply Brings Prices Down (USA Today)

Time will tell but the conversion of unsold condos to rentals seems inevitable and should help ease inflation down the road, reverse the trend of rising rental costs, and contribute to easing the high levels of unsold inventory. Something to keep an eye on especially for those looking to time their re-entry into a correcting housing market for most of the nation outside of Manhattan. Fundamentally speaking, all of this should be on your radar so that you can learn the after effects of the biggest bull run in housing recent history ever produced.