Curiously, Chicago and Las Vegas are the only two major cities that have not exceeded their housing bubble highs.
National Price Increase Most on Record
At the national level, year-over-year home prices are up 14.59%. That beats the housing bubble record of 14.51% set in September 2005.
The 10-City year-over-year high was 20.5% in July 2004.
Those are not median prices. Case-Shiller data reflects repeat sales of the same house over time.
Not Inflation?!
Of course this is inflation! It’s just that neither the BLS nor the Fed counts this as inflation. But if it’s not inflation, WTF is it?
The answer, of course, is the Fed presents nonsense.
Home Price Not in the CPI
Home prices are not in the CPI. They should be. Economists generally disagree with me, but what good is a measure of inflation that excludes key prices?
The CPI ignores housing prices, what corporations pay for health insurance on behalf of consumers, what Medicare, and Medicaid pay for healthcare on behalf of consumers, stock prices, bond prices, speculation in cryptos, and only looks at the prices of so called “consumer goods”.
Q: How relevant is the CPI as a measure of inflation?
A: Not very if at all.
The Fed has ignored those things at its peril.
The result was:
- A DotCom bubble and a DotCom crash
- A housing bubble and a housing crash
- An even bigger bubble now
Capital Expenses
The reason economists ignore housing is they view it as a capital expense. So what? Are we measuring prices or just the ones that allow bubbles to be easily blown?
It’s not possible to include prices such as stocks in the basket because they vary with earnings, but repeat sales of the same house and medical expenses are a different matter.
Personal Consumption Expenditures (PCE), the Fed’s preferred measure of inflation does take medical prices into consideration, but at the expense of even greater housing distortions.
Year-Over-Year Inflation
As measured by the CPI, year-over year inflation is 4.99%. But neither the CPI, nor PCE (the Fed’s preferred measure of inflation) include home prices. PCE is even lower than the CPI.
Even deeper into inflation reporting madness is mean-trimmed PCE at 1.9%.
A Far Better Way
We can calculate a better measure of inflation, by substituting actual home prices for OER in the CPI.
OER stands for Owners’ Equivalent Rent. It is an estimation of what homeowners would pay in rent if they rented their own house, from themselves, unfurnished, without utilities.
I calculate the CS-CPI by substituting actual home prices as measured by Case-Shiller for the OER component.
Real Interest Rates
Real means inflation adjusted. The standard measure of “real” is calculated by subtracting year-over-year measures of inflation from the Fed Funds Rate or 1-month T-Bill.
Most Negative Rates in Series History
- Real CS-CPI National: -7.24%
- Real CS-CPI Top-Ten: -7.20%
Both numbers are deeper into negative territory than in the housing bubble years.
The Case-Shiller housing data goes back to 1987. Year-over-year calculations start in 1988.
FOMO and YOLO
Housing and speculation are all the Fed has. And part of housing is speculation including FOMO, fear of missing out.
Zoomers prefer to call it YOLO. You only live once. On the YOLO theory, Dogecoin is a great buy.
Perhaps Dogecoin goes to $5. If so, hooray. If it goes to zero, so what? It’s YOLO. There’s always something else to speculate in and make up losses.
That is what the Fed is encouraging, either on purpose or out of ignorance.
Take your pick, but the result is the same: Cheap money encourages speculation in assets.
The Fed and the Bank of China Both Act to Punish Savers
Inquiring minds may wish to consider The Fed and the Bank of China Both Act to Punish Savers
The Fed’s explicit inflation policy is nothing other than financial repression of the poor for the benefit of asset holders (the wealthy).
Sadly, people in the US are likely to say “Look at what China is doing to its people” without stopping to think the Fed is doing the same damn thing.
End the Fed
I have many time proposed ending the Fed.
I am often asked “Replace the Fed with what?” The answer is “Nothing”. We do not need a group of charlatans who would not recognize “inflation” if it jumped up and spit grapefruit juice in their eyes.
The Federal Reserve was created on December 23, 1913. From 1776 until 1913 there was no Fed.
We need sound money, not the Fed whose goal is to destroy money at the rate of 2% a year to the guaranteed detriment of the poor and middle class.
Understanding What’s Going On
- How the Fed’s Inflation Policies Benefited the Top 1% In Pictures Part 1
- How the Fed’s Inflation Policies Benefited the Top 1% In Pictures Part 2
Bubbles Bust
The Fed says inflation is transitory. The Fed is correct but for a hugely wrong reason.
Inflation is transitory because the Fed itself has sown the seeds of another economic collapse.
Speculation eventually dies out. All bubbles burst. When that happens, the result is anything but inflation.
That leads us to the proper conclusion as discussed at length in Inflation Then Bubble Bust Deflation: A Video With Daniel Lacalle
Please play the video in that link. It’s a long one, but I tie many key ideas together including a discussion of deflationary age demographics.
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Mish
Regarding house price inflation, aren’t house building materials already included in the CPI somewhere? Maybe there’s a case for including Building Land in the CPI. Regarding repeat sales of the same house, I suppose on average they could be used to measure part of house price inflation but houses are improved, or extended, or let to go into disrepair, so they wouldn’t be a perfect measure.