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Home Prices Jump Another Percent, Fed Extremely Behind the Inflation Curve

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15 comments on Home Prices Jump Another Percent, Fed Extremely Behind the Inflation Curve

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Case-Shiller National and Top-10 City Home Price Indexes – Data via St. Louis Fed, Chart by Mish

Home prices jumped again in November according to the latest Case-Shiller Home Price Report.     

  • 10-City: +0.93%
  • 20-City: +0.99%
  • National: +0.90%

CS National, Top 10 Metro, CPI, Owners’ Equivalent Rent (OER)

Case-Shiller Home Prices vs OER, CPI, Rent, Chart by Mish

Chart Notes

  • The above chart shows Case-Shiller home price index compared to inflation measures from the Bureau of Labor Statistics (BLS).
  • OER is the mythical price the BLS calculates as if one would rent one’s own house from himself, unfurnished, without utilities.
  • Home prices are not directly in the CPI. 
  • OER is the single largest factor with a weight in the CPI of 23.51%. Rent of primary residence is 7.58% of the CPI.

Home prices disconnected from the CPI in 2000. OER and Rent have been rising much faster than the CPI since about 2015.

This dynamic has fueled more housing speculation. 17 percent of recent home purchases were made by people who already owned a house. 

CS National, Top 10 Metro, OER, CPI Year-Over-Year Percent Change

Year-Over-Year Comparisons, Data BLS and Case-Shiller, Chart by Mish

As of November, national home prices are up 18.81% from a year ago. The CPI was up 6.81% and OER a mere 3.13%.

Three Measures of Inflation 

CPI and PCE Measures from the BLS, CSAI Calculation by Mish

Chart Notes

  • CPI is the Consumer Price Index
  • PCE stand for Personal Consumption Expenditures. 
  • CSAI is a Mish calculation derived by substituting actual home prices in the CPI instead of OER. 

PCE is the Fed’s preferred measure of inflation. It counts inflation in items paid for on behalf of consumers, primarily medical care (e.g. Medicare, Medicaid, and corporate-paid health care benefits).

Accounting for those paid expenses, PCE overweights health care whereas the CPI overweights housing.

Neither the CPI nor PCE directly includes home prices.

The BLS’ rationale is that home prices are a capital good, not a consumer item.

My rationale, is so what? The Fed needs to focus on inflation, not just alleged consumer inflation. 

Fed Twiddles Thumbs

With it’s myopic focus on consumer prices instead of all prices, the Fed blew yet another asset bubble.

Prices of all sorts have been skyrocketing. Ask anyone looking to buy a home what it feels like.

An asset bubble has been brewing for years with Fed Chair Jerome Powell twiddling his thumbs. More accurately, Powell wanted higher inflation to make up for alleged lack of prior inflation.

The Fed could not spot huge inflation underway because it ignored housing and other asset bubbles. 

Stock Market Plunge Likely

Add it all up and the liquidity drain by the Fed is highly likely to cause another stock market crash or a long, slow drain like what happened in Japan.

For further discussion and charts, please see Stocks Hammered with the Nasdaq Plunging Again as Liquidity Dries Up.

This post originally appeared at MishTalk.Com. 

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Mike Shedlock

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Christoball
Christoball
2 years ago
Mish can you post a chart STOCK MARKET GRAPH 2007-2013 showing all the Dead Cat Bounces on the decline. I tried to post one but ws not ble to get it to load. I have renamed it Dead Saber Tooth Tiger Bounce because the market is so inflated
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Scooot
Scooot
2 years ago
Reply to  Christoball

I read this today on a similar theme.

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Christoball
Christoball
2 years ago
Reply to  Scooot
I just mentioned this because Real Estate will fall with the stock market. This will be really apparent in the most speculative and overpriced markets.
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Doug78
Doug78
2 years ago
Housing prices were a big factor of Intel’s decision to build their megafactory in Ohio.
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KyleW
KyleW
2 years ago
It’s unbelievable that housing wouldn’t be one of the main things they look at. The definition of inflation needs to go back to being an increase in the money supply, but as long as they are looking at prices, they should be considering stock prices, wages, and housing too. Maybe they see it and they just don’t want to see it. It’s much easier to create money than stop.
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StukiMoi
StukiMoi
2 years ago
Reply to  KyleW
The closer you are to The Fed, the greater the share of your wealth is held in stocks, bonds and “real estate.” And the greater the share of your income which correlate with prices in stocks, bonds and “real estate.”
Hence, if the goal is to rig up a racket which favors those closest to The Fed: It behoves to:
1) Rig it so that The Fed can keep enriching the people whose shares of wealth and income correlate the closest with prices of stocks, bonds and “real estate,” without that arbitrary enrichment increasing any “measure” which The Fed is supposed to keep from increasing too quickly.
and 2) Instead rig one’s arbitrarily chosen “measure” such that any increase in the price of those things which comprise a higher share of the wealth and income of those further from The Fed, among them wages, will immediately flag red if they increase.
That way, The Fed can keep the measure from increasing, by simply transferring more and more wealth and income from those further from the Fed, to those closer to The Fed. Without stating explicitly that this is The Fed’s sole and only aim, as well as the sole and only reason The Fed exists at all.
It’s not any more complicated than that.
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Eddie_T
Eddie_T
2 years ago
This dynamic has fueled more housing speculation. 17 percent of recent home purchases were made by people who already owned a house. 
What has fueled housing speculation is the understanding that buying an asset that beats real inflation and financing it with 30 year money that has a real rate of less than zero makes fairly good sense, especially if the house has positive cash flow and it’s in a growing city with jobs. 
And when bank CD’s pay 1% and there are no really safe places to put your money? Why not?
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Scooot
Scooot
2 years ago
Reply to  Eddie_T
In the UK you can no longer offset interest costs for tax purposes for second homes, so if you borrow to buy-to-let you pay tax on the full rental income. It’s significantly changed the dynamics of doing so. 
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Eddie_T
Eddie_T
2 years ago
Reply to  Scooot
If I buy in the UK, it will be to live in, not rent. Prices are high, but it’s a beautiful country. I often look at property in the UK, particularly in Wales. I was also very taken with the sheep country up around Hadrian’s wall. I don’t expect for it to happen, but I daydream about it.
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Scooot
Scooot
2 years ago
Reply to  Eddie_T
There’s some lovely spots and prices vary considerably across the country.
They introduced the new tax regime because so many locals were being priced out of their home towns by people buying second and holiday homes. As interest rates are so low the problem still exists in many areas but as they start to rise ……
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Maximus_Minimus
Maximus_Minimus
2 years ago
Reply to  Eddie_T
I was disappointed if not shocked that there were building solar panel farms in beautiful, rural Devonshire in order to collect some energy from sunlight, when there already is energy collected from sunlight called agriculture.
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Doug78
Doug78
2 years ago
Reply to  Eddie_T
This is how house prices rose in the 1970’s inflation:
It was writtten in 2017 and speculates what house prices would be if we had a 1970’s style inflation. It was very predictive as to prices now.
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Maximus_Minimus
Maximus_Minimus
2 years ago
Reply to  Doug78
In 1970, there was still the idea that economic indicators should make some sense, debt was to be paid, and so on. We are far from that solid ground.
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Scooot
Scooot
2 years ago
Reply to  Doug78
Our first house cost £27.5k in 1982. When we moved in 1988 it went for £68k and it hadn’t changed other than decor. That’s a compound rate of about 16.25%. 
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1-shot
1-shot
2 years ago
Reply to  Doug78
Great info. Thanks
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