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Home Prices Have Peaked, Case-Shiller Data Lags, Now What?

I am extremely confident housing prices have finally peaked this cycle. So, where do prices go from here, and how fast?
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Case-Shiller home price data via St. Louis Fed, chart by Mish

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

Home Price Synopsis 

Home prices have peaked this cycle but one would not know that by looking at the raw numbers or the chart.

The Case-Shiller National Index hit a new high in June of 483.5, up from 480.7 in May, and 473.0 in April. 

The Case-Shiller 10-City Index hit a new high in June of 520.4, up from 518.9 in May, and 512.8 in April. 

Q: Why am I confident the top is in?

A: Case-Shiller data lags. It is a three month average of the preceding three months. The June report is effectively from April-May, and this is August. 

Moreover, prices have already declined in Denver, Los Angeles, San Diego, San Francisco, and D.C.

Next month I expect to see declines in more cities. Within two months, the national index will turn lower. But the top is already in. 

Understanding the lag, April is likely the peak month nationally.

Home Prices Disconnect From Rent and OER

CS National, Top 10 Metro, CPI, OER 2022-06

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 23.5% of the total CPI.
  • Rent of Primary Residence is a CPI component with a weight of 7.2% 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

CS National, Top 10 Metro Percent Change 2022-06

Percent Change From Year Ago Notes (June 2022)

  • CPI: 9.06%
  • OER: 5.48%
  • Rent: 5.78%
  • Case-Shiller 10-City: 17.37%
  • Case-Shiller National: 17.96%

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 11.20%, just under the 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

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

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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.

Regardless, 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.

Inflation matters, not just alleged consumer inflation.

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

Leading Theories - Now What? 

  1. This is not a bubble and prices will remain firm
  2. Prices will crash
  3. Prices will do a slow bleed ultimately resulting in a steep decline

Theory number 1 pertains to the fact this is not 2008, there are no liar loans, there will not be people walking away. 

Theory number two says people will quickly reduce prices to dump declining assets. 

Right now I favor scenario number 3, essentially the mid-point of the first two.

Economically speaking, the best scenario is number 2, a price crash.

Q: Why is a crash the best scenario
A: Because the longer and higher home prices stay elevated, the less household formation, the less residential investment, the less new home construction, the less durable goods and appliance purchases, etc.

The longer and stronger housing prices remain firm the longer we will have weak growth. 

 A crash is not benign, however. The wealth impact of a crash will destroy some demand as will a stock market decline.

The Fed is Openly Cheering the Stock Market Plunge Following Jackson Hole

It is very important to note that The Fed is Openly Cheering the Stock Market Plunge Following Jackson Hole

Minneapolis Fed president Neel Kashkari was ‘Happy’ to See the Stock Market’s Reaction to Jackson Hole.

Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

On August 19, I commented Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

On August 26, at Jackson Hole, Fed Chair Jerome Powell Pledges to "Act With Resolve" to Beat Inflation

Key comments: "Reducing inflation is likely to require a sustained period of below-trend growth."

Stocks are priced for perfection, not a long period of weak growth, and with the Fed openly cheering their demise.

This post originated on MishTalk.Com.

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