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 (February 2022)
- CPI: 7.87%
- OER: 4.31%
- Rent: 4.17%
- Case-Shiller 10-City: 18.57%
- Case-Shiller National: 19.80%
CPI Understated?
Yes, by a lot.
I do not believe OER is only up 4.31%. Nor do I believe rent is only up 4.17%.
Moreover, home prices are not directly in the CPI, only OER and and Rent.
CPI vs Case-Shiller Adjusted CPI
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 10.74%. 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
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 19% but the Fed Funds Rate at 0.08% in February, 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 Biden and one by Trump
- Supply chain disruptions
- Massive change in consumer preferences from services to goods
- QE finally mattered
- War – Not reflected in these charts as home price data only through February
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
Case-Shiller home price data for February is a three-month average of closed sales for December, January, February. And those sales reflect deals made a month or two earlier.
Because of this lag, Case-Shiller indexes may appear to be rising three to five months after prices start to fall.
CPI Up Most in 40 Years
For more on the CPI, please see CPI Rips Higher to 8.5 Percent From a Year Ago, the Most Since 1981.
That link is for March.
Alleged “Benefits of Running the Economy Hot”
Recall that Charles Evans, president and chief executive officer of the Chicago Fed wants to run the economy hot.
Please see Chicago Fed President Praises the “Benefits of Running the Economy Hot”
Housing Bust Has Arrived
New home sales declined 8.6 percent in March and are down 12.6 percent from a year ago.
For discussion, please see New Home Sales Take a Big Dive From Upward Revisions
This post originated on MishTalk.Com.
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Mortgage applications decreased 8.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 22, 2022.
The Market Composite Index, a measure of mortgage loan application volume, decreased 8.3 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 7 percent compared with the previous week. The Refinance Index decreased 9 percent from the previous week and was 71 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 8 percent from one week earlier. The unadjusted Purchase Index decreased 7 percent compared with the previous week and was 17 percent lower than the same week one year ago.
“With mortgage rates increasing last week to the highest level since 2009, applications continued to decline. Overall application activity fell to the lowest level since 2018, with both purchase and refinance applications posting declines.
was part of the Coronavirus Response and Relief Supplemental
Appropriations Act of 2021 was signed off by Trump on 27 December 2020.
It provided a one-off check of up to $600, but this
time, households were also able to claim an additional $600 for child
dependents aged 16 or under. Those who earned under $75,000 in the 2019
tax year received the full stimulus check, while a steadily smaller
figure was given to those on a higher annual income, up to a maximum
phase-out limit of $87,000. The first payments, through direct deposit
and paper checks with some later payments made by EIP 2 Cards, were issued between 29 December 2020 and 15 January 2021.”