Sunday, January 22, 2006


by Tom Bozzo

(Welcome, NYT Walk-Through readers. Some other mostly-Madison real estate posts are linked here, or look around.)

Yesterday's Capital Times reports that one of Madison's Frank Lloyd Wright-designed residences quietly changed hands in the fall. The Robert "Robie" Lamp House, built in 1903, sold to a developer for $470,000. It needs work. The likely fate, for the time being, is to be restored as part of a condo development involving some adjacent properties on East Mifflin St. also owned by the developer, who does seem to realize that he has a responsibility to treat the house well.

You can rent the house for $1,400/month as of February. Call 608-255-3753.

This also highlights why the official inflation data for housing have been screwed up of late. The owner-occupied housing component of the Consumer Price Index is constructed by reweighting a sample of rents to represent the owner-occupied housing stock. The basic idea, which is not unsound, is that the rent an owner could get for the house (and is, in effect, paying to him or herself) represents the consumption, versus investment, component of home ownership.

The method has two practical problems. First, in much of the country, the owner-occupied housing stock resembles the rental housing stock so little that it's a stretch to make some small subset of rented houses represent the owner-occupied units. This would be expected mostly to affect the statistical efficiency of the estimates — because there are few rental units to represent large segments of owner-occupied housing — but could lead to a bias if there's really just no way to reweight the rentals into a valid representation of owned houses.

Second, it's a leap to suggest that market rents necessarily constitute "rational" rents for the owner-occupied housing. In the case of the Lamp house, the $470,000 could be put in a money market fund and earn nearly $1,600/month. Alternately, a purchase hypothetically financed by a no-money-down, interest-only loan at 6% would set a Wisconsin-resident owner-occupier in the 25% Federal income tax bracket about $2,250/month after tax deductions, with the property assessed at 100% of the transaction price; which doesn't include maintenance or other housing "consumption" expenditures. In short, it's not a great deal to pay $470,000 to be able to collect $1,400/month rent. (Of course, the developer-owner's motivation is unusual in this case, though it's not unreasonable to believe that the transaction price wouldn't have been much different with an owner-occupier.)

That there's undoubtedly an FLLW premium in the Lamp house's price over what you'd normally get for a 1,660-square foor downtown house doesn't necessarily help matters for the CPI. That is, paying an FLLW premium that doesn't translate into higher market rent could easily be construed as consumption of a status good.

It's been noted, for instance by Steve Kyle in the MaxSpeak comments, that there isn't reason to suspect systematic long run bias (with the emphasis on long run) — what goes too far up can and usually will come back down. However, the apparent short run bias is not negligible when it's taken low measured inflation to make some key quality-of-life measures (wages, for instance) appear merely poor instead of terrible.
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