Current Case-Shiller data, released today, is through November. The rest of the numbers from the BLS reflect the same timeframe.
OER stands for Owner’s Equivalent Rent. It’s the price one would pay to rent their own house from themselves, unfurnished, without utilities.
November 2022 Comparison
- Case-Shiller National: 7.69 Percent
- Case-Shiller 10-City: 6.31 Percent
- Primary Rent: 7.91 Percent
- OER: 7.13 Percent
- CPI: 7.11 Percent
- Fed Funds Rate: 3.78 Percent
That pretty much says most of what you need to know. As of November, the Fed was still far behind the curve by any reasonable measure.
Let’s go through the math and my preferred measure of CPI that factors housing into the equation.
A Better Measure of Inflation Rationale
- We can calculate a better measure of inflation by substituting home prices for Owners’ Equivalent Rent in the CPI.
- OER is the single largest component in the CPI with a weight of 24.235 percent as of December 2022. The number changes slightly every month.
- The BLS used to have home prices directly in the CPI but abandoned the practice on the theory that homes are a capital expense, not a consumer expense.
- I put housing back in an alternate CPI because inflation matters, not just alleged consumer inflation. Also bubbles matter, as the Fed unfortunately has proved time and time again.
Real Interest Rates CPI and Case-Shiller
Real Interest Rate Notes
- The Real CPI Interest Rate is the CPI minus the Fed Funds Rate
- The Real CSAI is formed by substituting the percentage rise in the National Case Shiller home price index instead of OER, then subtracting the Fed Funds Rate.
Explaining the Housing Bubble and Great Recession
- In 2004, the Fed held its key interest at roughly 1 percent despite a roaring housing bubble.
- I calculate real interest rates of -2.24 percent based off the CPI and -4.57 by my preferred measure.
- By 2007, my measure or real interest rates went from -4.57 percent to +4.07 percent. Is it any wonder prices crashed and a Great Recession started?
In 2020, the Fed the Fed fueled its already huge asset price bubble with reckless QE and entirely predictable results.
Case-Shiller Home Price Index
This is precisely what happens when the Fed blows bubbles.
One of my readers commented that substituting home prices for OER is a big nothing burger because you either own your house outright or have fixed mortgage payments that aren’t changing.
This is a very wrong view. The Fed created huge bubbles with long-term economic distortion and damage.
The Fed also created big sets of winners and losers, also with huge economic damages in the future. This economic damage will last for many years.
The Fed blew bubbles that it would not have (at least not as big) had it just taken home prices into consideration.
Instead, the Fed woodenly look at the PCE price index which has an even smaller percentage of OER.
Looking Ahead
- Home prices are still stubborn because real interest rates are still negative.
- Also, we do not have the same extent of liar loans now as we did in in 2006-2007.
- Unless home prices collapse, the housing market will remain depressed because 30-year mortgage rates are still above 6.0 percent.
- It’s cheaper to rent with stubborn prices.
As of now, real interest rates are still negative, but that will change in the next few months.
Eventually the Fed will overshoot, but as long as home prices stay stubbornly high, it will be cheaper to rent at these interest rates.
And if housing remains sluggish, don’t expect much from the economy.
Home Prices Falling But Remain Very High
For more discussion of housing, and Case-Shiller prices, please see Home Prices Falling But Remain Very High, San Francisco Negative From Year Ago
This post originated on MishTalk.Com.
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Mish
“One of my readers commented that substituting home prices for OER is a big nothing burger because you either own your house outright or have fixed mortgage payments that aren’t changing.
This is a very wrong view. The Fed created huge bubbles with long-term economic distortion and damage.
The Fed also created big sets of winners and losers, also with huge economic damages in the future. This economic damage will last for many years.“
Mish. You and your reader are both right. You are looking at the big picture while he is focused on how things affect him personally.
If inflation causes his house to increase in value by 50k per year, his stock portfolio to go up by 100k, his salary to go up by 5k, and his food and energy expenses to increase by 3k per year, he is taking advantage of the siutaion.
The world is a complicated place.
Life is not fair, and it never will be.
There will always be winners and losers.
Whether the winning or losing conditions are “created” by the Fed, or by a thousand other things, doesn’t matter. What matters is what each individual does in response to what is happening in the world around them. Because you have no say in how the world works; including the Fed.
Someone who owns their home has an asset that is likely increasing in price because of inflation. Someone who rents does not get the same benefit.. As to why each individual is in their situation is impossible to say. However, if you have learned that home ownership is a good way to enhance your life, increase your wealth, force you to save, profit from inflation, and avoid the vagaries of renting, then you have some say in making your life better. If you rent because you never learned how to benefit from home ownership, then you might be one of a chorus of people who complain about how life is unfair and the government should fix things for you.
Similarly, someone who acquires skills and education to get a a good job or career and make a better life for themselves will be a winner. Someone who never bothers to acquire the skills and education will be a loser.
As I frequently say; I cannot change how the world works. All I can do is take advantage of how the world works. One way to do that is to be a home owner.
Another example; because of global warming, much of the world is attempting to transition from fossil fuels to renewables. There is nothing I can do about global warming or the worlds response to it. All I can do is take advantage of the situation.
Biden introduced the inflation reduction act with a lot of subsidies for renewables. Many here complain about it. But you can’t stop it. All you can do is look into how to take advantage of this act.
Eventually, the government will change and new policies will appear. And you won’t be able to prevent that either. But you can understand the policies and then take advantage
bubble do you think we are in right now real estate wise. Double,
triple, quadruple?
was chatting to my parents about real estate since they are eventually
going to have to sell their home given they are in their early 80s now.
They reminded me that in 1965 (year I was born) they bought their first
house for 14K or so. In 1978 when we moved to the house they are still
in, they sold that 1st house for 44,900 (call it 45K). That means in 13
years, the home value tripled (14->45) and in 1978 interest rates
were vastly higher than today.
the top chart (your prior article) it peaks at 800 in 2022. If I go back 13 years to
2009/2010 it was around 250-300. So in 13 years it’s tripled. Not much
different than 1965-1978 time frame. Would you say you remember home
prices being in a bubble in 1978?
Unit: Ratio. S&P 500 Price to Sales was 2.37 as of 2023-01-27, according to S&P Dow Jones Indices. Historically, S&P 500 Price to Sales reached a record high of 3.17 and a record low of 0.65, the median value is 1.54. Typical value range is from 1.68 to 2.54. The Year-Over-Year growth is -14.03%
Unit: USD. S&P 500 Book Value per Share was 996.29 as of 2022-09-30, according to S&P Dow Jones Indices. Historically, S&P 500 Book Value per Share reached a record high of 1,008.02 and a record low of 290.68, the median value is 603.56. Typical value range is from 718.76 to 926.62. The Year-Over-Year growth is 1.35%
Insider Buy/Sell Ratio – USA Overall Market was 0.22 as of 2023-01-01, according to GuruFocus. Historically, Insider Buy/Sell Ratio – USA Overall Market reached a record high of 2.01 and a record low of 0.12, the median value is 0.34. Typical value range is from 0.19 to 0.65. The Year-Over-Year growth is -55.1%.