Home Prices Disconnect From Rent and OER
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
Percent Change From Year Ago Notes (April 2022)
- CPI: 8.26%
- OER: 4.79%
- Rent: 4.46%
- Case-Shiller 10-City: 19.66%
- Case-Shiller National: 20.39%
CPI Understated?
Yes, by a lot.
Home prices are not directly in the CPI, only OER and and Rent.
And rent prices are up much more than the BLS claims because rent price lag as well.
Three Measures of Inflation
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 11.18%.
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
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 0.33% in April, 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?
- Three rounds of fiscal stimulus, two by Trump but a massive one by Biden
- Eviction moratoriums enabled spending demand elsewhere
- Supply chain disruptions
- Massive change in consumer preferences from services to goods
- 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.
Case-Shiller Lag and the Rear View Mirror
Case-Shiller home price data is a three-month average of prior closed sales. And those sales reflect deals made a month or two earlier.
Home Prices Have Peaked
Big discounts are happening in many markets already. And existing home sales data off which Case-Shiller is based has been very weak.
For discussion please see Existing Home Sales Skid Another 3.4 Percent in May, Down Fourth Month
Ignore the fact that median sales price levels are still rising. The proper comparison is repeat sales of the same home, which Case-Shiller does.
However, due to the lagging nature of the data, it may still be a few months before the index peaks.
This post originated on MishTalk.Com.
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Mish
This doesn’t mean they’re necessarily correct. In fact, in some areas it’s impossible to be “correct” because there are legitimate conceptual issues. Unemployment is a good example. Another one is over in Federal Reserve-land. I believe they’re the keeper of the productivity data. Big conceptual issues there: How to measure productivity in services. Inflation too. In goods, the price changes are adjusted for quality improvements. Very hard to do that in services.
Still, given all of that, I don’t think anyone has been putting their finger on the scale for political motives. Mish is shooting holes in the housing stats, and I think he’s been making an intriguing case. It helps that I generally have a high degree of respect for his ability, his skill in boiling it down, and in picking the right numbers to look at. But when he makes these adjustments to the current data, he needs to adjust backwards, because one of the most important functions of these stats is comparability over time.
If inflation is really 11%, fine. Just make perhaps more effort to be comparable to earlier periods. Also: Recognize that maybe the 1970s housing price formula was flawed. In any case, it’s the trend that matters most, and the trend needs to be presented on a comparable basis. Back to productivity and inflation. There have been structural economic changes over the decades, and the move to a predominantly services economy presents serious, legitimate and necessary comparability issues.
Bottom line: Even when the stats are wrong, no one’s making them up. It’s harder than it looks.
The Market Composite Index, a measure of mortgage loan application volume, increased 0.7 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 20 percent compared with the previous week. The Refinance Index increased 2 percent from the previous week and was 80 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 0.1 percent from one week earlier. The unadjusted Purchase Index decreased 21 percent compared with the previous week and was 24 percent lower than the same week one year ago.
“Mortgage rates continue to experience large swings. After increasing 65 basis points during the past three weeks, the 30-year fixed rate declined 14 basis points last week to 5.84 percent. Rates are still significantly higher than they were a year ago, when the 30-year fixed rate was at 3.2 percent,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The decline in mortgage rates led to a slight increase in refinancing, driven by an uptick in conventional loans. However, refinances are still 80 percent lower than a year ago and over 60 percent below the historical average.”
Added Kan, “Overall purchase activity has weakened in recent months due to the quick jump in mortgage rates, high home prices, and growing economic uncertainty. Purchase applications were essentially flat last week but were supported by a 6 percent increase in government loan applications. The average purchase loan amount declined to $413,500, which highlights an ongoing downward trend seen since it hit a record $460,000 in March 2022.”
Business colleague of mine has been looking for a vacation home in FL for about 6-8 months.
The Real Estate Agent just started calling him 3-4 times a week with price drops, discounts, etc… He’s waiting it out.
Same old story. Looking at the trees. Missing the forest.
Right. Inflation has nothing to do with prices.
By analogy: If you get a medical problem and it gets worse, the worsening will go far to tell you how serious the problem is. But the progression says nothing about the cause. It could help shed light on the type of malady, whose expected progression will likely have been studied. But the fact that your bladder cancer spread to your lungs in 6 months is not what gave you cancer.
If the Fed’s not creating too much money, price increases in one or more sectors will be counterbalanced by declines elsewhere. This explains oil v lumber right now. People are paying double or triple for motor fuel, heating oil, and propane. They’re feeling the squeeze. Housing is seeing it, and is contracting. Lumber prices are declining.
Three rounds of fiscal stimulus, two by Biden and one by Trump
I think that it was two rounds of stimulus by Trump and one round by Biden.
full employment and stable inflation, the neutral rate is the hypothetical equilibrium
rate of interest that is neither expansionary nor contractionary. Note that,
of excess of global savings relative to the demand for investment funds.
https://worldpopulationreview.com/state-rankings/gun-ownership-by-state