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Case-Shiller Home Prices Reach New Record High, But This is Rear View Mirror Look

Case-Shiller housing price indexes for March, released on May 31, show new record highs as do housing-adjusted measures of the CPI.
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Case-Shiller home prices via St. Louis Fed, chart by Mish

Case-Shiller home prices via St. Louis Fed, chart by Mish

Home Prices Disconnect From Rent and OER

CS National Top 10 Metro CPI OER INDEX 2022-03

Home Price Disconnect Notes

  • National is the Case-Shiller national home price index.
  • 10-City represents the weighted average of the cities in the first chart.
  • CPI is the Consumer Price Index
  • OER stands for Owner's Equivalent Rent. It is the single largest component in the CPI with a current weight of 24.151% of the total CPI.
  • Rent of Primary Residence is a CPI component with a weight of 7.374% of the CPI.

OER is the mythical price the Bureau of Labor Statistics (BLS) says one would pay to rent one's own house from oneself, unfurnished, without utilities.

CS National, Top 10 Metro Percent Change From Year Ago

Case-Shiller home price data and CPI data via St. Louis Fed, chart by Mish

Case-Shiller home price data and CPI data via St. Louis Fed, chart by Mish

Percent Change From Year Ago Notes (March 2022)

  • CPI: 8.52%
  • OER: 4.56%
  • Rent: 4.46%
  • Case-Shiller 10-City: 19.49%
  • Case-Shiller National: 20.56%

CPI Understated?

Yes, by a lot.

I do not believe OER is only up 4.56%. Nor do I believe rent is only up 4.46%.

Moreover, home prices are not directly in the CPI, only OER and and Rent.

Three Measures of Inflation

CPI data from the BLS, PCE from the BEA, the adjusted CPI is a Mish calculation

CPI data from the BLS, PCE from the BEA, the adjusted CPI is a Mish calculation

Adjusted CPI Discussion

My Case-Shiller adjusted CPI is calculated by substituting the percentage change in the Case-Shiller national index for OER in the CPI.

The result is an adjusted annual CPI rise of 11.42%. That's a new record high for this data series.

There is a lot of controversy over this procedure. The BLS and many economists will point out that houses are not a "consumer" expense but a "capital" expense.

That's technically accurate except historically home prices used to be in the CPI so historical comparisons are a bit distorted.

The problem with being "technically" accurate is that it is a huge mistake by the Fed to ignore asset bubbles. Inflation matters, not just alleged CPI inflation.

This historical distortion never mattered much in practice because the second chart shows OER, the CPI, rent, and home prices all rose in sync.

Real Interest Rates

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CPI data from the BLS, the adjusted CPI and Real Interest Rates are Mish calculations

CPI data from the BLS, the adjusted CPI and Real Interest Rates are Mish calculations

Real Interest Rates Discussion

One can calculate "real" (inflation-adjusted) interest rates by subtracting the rate the Fed charges from CPI measures.

Mortgage rates had been around 2% in January but have since soared so one could formulate another version of "real" based on mortgages.

No matter how you slice it, rates are amazingly low. With home prices up over 20% but the Fed Funds Rate at 0.20% in March, it's no wonder we have another housing bubble and bubbles in equities.

The Fed wanted higher inflation and finally got it in spades.

Why the Inflation Surge?

  1. Three rounds of fiscal stimulus, two by Biden and one by Trump
  2. Supply chain disruptions
  3. Massive change in consumer preferences from services to goods
  4. QE finally mattered

The War is barely reflected in these charts as it began in February of 2022.

Poor Measure of Inflation

The big problem the Fed failed to see is that the CPI is an extremely poor measure of inflation.

I assure you inflation matters, not just alleged consumer inflation.

The Fed missed a huge jump in inflation because it does not know what to look at.

Case-Shiller Lag and the Rear View Mirror

Case-Shiller home price data for March is a three-month average of prior closed sales. And those sales reflect deals made a month or two earlier.

Home Prices Have Peaked

Home prices have peaked. Big discounts are happening already and the sales data is very weak. Here are some discussion points.

Due to the lagging nature of Case-Shiller home price measurements, it may be a few months before the index peaks.

This post originated on MishTalk.Com.

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