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Housing Adjusted Real Interest Rates Sink to a Record Low -8.5 Percent

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50 comments on Housing Adjusted Real Interest Rates Sink to a Record Low -8.5 Percent

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Case Shiller released home price data on Tuesday. The National home price index  jumped 18.6% from a year ago setting a new record for the series.

CS National, Top 10 Metro ,CPI, OER Percent Change 

Key Points

  • The National home price index rose 18.6% from a year ago setting a new record for the series, easily beating the housing bubble max increase of 14.5%.
  • The 10-city metro average rose 18.5% from a year ago but still under the housing bubble peak of 20.5%. 
  • According to the BLS, rent was only up 1.92% from a year ago. 
  • Owners’ Equivalent Rent (OER), the mythical price one would pay to rent one’s own home from oneself, unfurnished and without utilities, was allegedly up a mere 2.34% year-over-year.
  • The CPI for June was up 5.39% from a year ago.

Case Shiller Home Price Index National and Top 10 by City

Special congratulations to Chicago, the only major metro area whose home prices ares still below the 2007 housing bubble peak.

Las Vegas, the only other holdout, escaped this month.

Denver is through the roof.

It’s Inflation Stupid!

OK home prices are a capital expense. So what? 

Inflation matters, not just alleged consumer inflation.

Home prices are easily measurable and there is no valid reason to exclude them from inflation indexes (yes, that means you).

You can still have your CPI if you want it, but it is actually a useless measure of inflation on many fronts.

A Better Measure of Inflation

We can calculate a better measure of “inflation” by substituting home prices for Owners’ Equivalent Rent in the CPI.

OER is the single largest component in the CPI with a weight of 24.071%.

To appease the inflation illiterates who do not understand inflation and consistently get hung up on the irrelevant word “consumer” let’s call the result Case-Shiller Adjusted Inflation (CSAI).

Case Shiller Adjusted Inflation

CSAI Comparison Measures 

  • National: 8.57%
  • 10-City Metro: 8.55%
  • CPI: 5.39%

Real Interest Rates 

Explaining Financial Speculation

For June, the Effective Fed Funds rate was 0.08%. The above chart shows the Fed Funds Rate minus the CPI and the Case-Shiller Adjusted Inflation Rates. 

Real interest rates on an adjusted basis are about -8.5%. Even as measured by the CPI, real interest rates are deeply in the hole at -5.3%.

30-year mortgage rates are around 2.5%. Home prices rose 18.6%. 

Is is any wonder there is so much financial speculation? 

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50 Comments
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Oldest Most Voted
ColoradoAccountant
ColoradoAccountant
4 years ago
It can all be explained by sitting quietly and repeating the phrase:  “Our leaders are incompetent.”  Acceptance of this will free you.
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RonJ
RonJ
4 years ago
“Housing Adjusted Real Interest Rates Sink to a Record Low -8.5 Percent”
Meanwhile, the Port of Los Angeles got to a new record 47 cargo ships waiting outside for a birth to unload their
containers. There are records all around.
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StukiMoi
StukiMoi
4 years ago
Add the decay of the physical structure (5%? 10%?) to the 8.5%, and you move somewhere towards the share of the annual crass theft, from productive people, perpetrated by debasement; which is handed out to “home owners” in exchange for absolutely nothing. Another similar chunk being handed out via “financial” “markets.” To equally idle and 99.98+% useless leeches…. And another one via shakedowns by ambulance chasers and kangaroo courts. And via mandates imposed to feed the idiots…. Etc., etc…
And people wonder why Americans no longer bother enough with productive pursuits to compete at anything. Why US cars are almost universally at the bottom of desirablity, US buildings fall down, planes fall out of the sky, and even our once-was military get buttkicked like they weren’t even there, by dudes in sandals running barely above idle for about a week.
But hey, nothing like the bliss of being a welfare recipient “making money” from ones home. Benefitting from all the value creation that wallfungi does! We’ve got some hardworking fungi here in these Americun walls!
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Jackula
Jackula
4 years ago
And this is not enough craziness for AOC and her crowd. They want to remove Powell. I did not know the numbers were this bad. This is horrible for the long term economy.
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davebarnes2
davebarnes2
4 years ago
We bought our house in Denver 10 years ago. The market value has doubled. But, it is all meaningless as we don’t plan to sell for 20+ years.
We do not count our house as part of our net worth even though the market value is $950K.
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Eddie_T
Eddie_T
4 years ago
Reply to  davebarnes2
Twenty years will go by pretty fast.  My house has quintupled in nominal value in 28 years. I don’t count that in my net worth either, but I will when I sell and pocket the cash. Which I will.
I really think it’s a fairly safe bet I don’t end up upside down on my mortgage now, and you probably won’t either… 
Whoever makes the rules for what constitutes a “high net worth individual ” (HNWI) or a “very high net worth individual” (VHNWI), or an “ultra high net worth individual” (UHNWI)…….those definitions always specify you can’t count your personal house. I’m not sure who decided that, but them’s the rules.
But down here in the sticks  some of us have several million dollars equity in our personal RE, and I could give a sh*t  whether that technically keeps me in HNWI group vs. the VHNWI group. My personal houses and my ranch are not “investments” per se, but I’m happy to have seen them appreciate over time, and they are financial assets, after all.
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FromBrussels
FromBrussels
4 years ago
Reply to  Eddie_T
I don t like the smell of boast….can someone open the window here!
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Eddie_T
Eddie_T
4 years ago
Reply to  FromBrussels
I’m just tired of the arguments that say appreciation in the value of  house is “meaningless”.  
It’s not nearly as meaningless as investing in nothing and then going off on the Fed for destroying the buying power of the USD. 
Tangible assets are a valuable hedge. The Fed is the Fed. They do what they do and there is nothing you can do about it except hedge. You hedge or you end up without much to live on in your old age.
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FromBrussels
FromBrussels
4 years ago
Reply to  Eddie_T
makes sense….
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mrchinup
mrchinup
4 years ago
Reply to  davebarnes2
In twenty years we might not be using dollars.
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Casual_Observer2020
Casual_Observer2020
4 years ago
Based on other countries with zero or negative rates, I would say these prices are sustainable. Japan and Switzerland come to mind. The chances of us becoming more like a Japanese work culture where people work 20 hours a day for 4 hours of sleep and nothing else are high.  Buy now or be priced out forever.
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Cocoa
Cocoa
4 years ago
Reply to  Casual_Observer2020
Americans are technically more productive workers.
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EGW
EGW
4 years ago
Reply to  Casual_Observer2020
We are well on our way to becoming like Japan when it comes to asset prices and financial markets, and it’s not a good thing.
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FooFooFed
FooFooFed
4 years ago
They don’t include housing because the institution they serve is a broken record and the path they follow will never change. Those who try will be removed. The same pattern repeated over and over. The intellectuals can’t see that because they identify with those customary patterns in their day to day life. It’s equivalent to listening to the same Miley Cyrus record your whole life and saying each time… this is So Great! Conditioned from cradle to grave.
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EGW
EGW
4 years ago
Rents are rising fast and will show up in the OER measurement in the subsequent months.
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Eddie_T
Eddie_T
4 years ago
Reply to  EGW
Why would it?  How are homeowners supposed to parse rising rents? Do they get calls from leasing agents telling them what their house will rent for?
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EGW
EGW
4 years ago
Reply to  Eddie_T
You fundamentally don’t understand what I’m talking about. OER makes up a large part of the CPI figure and rental housing costs influence OER. Data like OER, rental housing costs, etc. is always a lagging indicator so it can take a bit of time for it to show up in other lagging indicators like CPI.
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Eddie_T
Eddie_T
4 years ago
Reply to  EGW
OER numbers come from surveys of homeowners who report what they think their house would rent for, right? 
Or am I in error on that?  
My question pertains to that specifically. I DO think I understand exactly what you’re talking about.
What I don’t understand is how any homeowner could have a clue what their own house would rent for, especially when their own payments are likely flat,  and more especially so, in a rapidly rising market, when even RE pros have a hard time setting rents.
If OER actually was a decent metric, then you would be right. It would just lag. But OER is not a true metric of the cost of rent in the first place.
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EGW
EGW
4 years ago
Reply to  Eddie_T
OER is a decent measurement of the cost to rent, it’s not necessarily “exact” or “perfect” but most things rarely are. Surveys are a perfectly reasonable method of collecting information provided you have an adequate sampling size.
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EGW
EGW
4 years ago
Reply to  Eddie_T
If you want to debate the lack of a housing asset costs in the CPI figure, that’s a totally different problem and i think the CPI should reflect asset prices as much as rent expenses.
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Eddie_T
Eddie_T
4 years ago
Reply to  EGW
“OER is a decent measurement of the cost to rent”
I really don’t think that’s even remotely close to being true, and I’ve explained why I think that . You have not explained why you have so much faith in OER as a decent metric.  If anybody really can make a more complete explanation of WHY anybody should put any faith at all in OER, I’m open to being convinced. But it takes more to convince me that it does you, apparently.
If I call you and ask you what your home would rent for, how do you know the answer? Maybe you personally have a good idea if you’re intimately involved in the RE market, but the average homeowner has no way that I know of to estimate what their house would rent for.
You can make that argument that the “1% rule” applies…but most homeowners don’t even know that much, and that’s a just a very rough guess, especially as the years pass and the house value likely rises…and rises unevenly, with some years flat and some making huge moves like 2020.
You make a lot of blanket statements like you’re a real authority. Hey, do you by any chance work for the Federal Reserve?  Or worse yet, are you an economist?
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PostCambrian
PostCambrian
4 years ago
What kind of investment (like housing) continues to go up in price but gives a lower return on investment (rent)?
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Eddie_T
Eddie_T
4 years ago
Reply to  PostCambrian
ROI on rentals lag when prices are going up fast, because taxes rise and vendors jack up repair costs…..but they don’t stay down unless the market crashes and rents fall instead of rising.
At this moment the interest rates on my remaining loans are going down, and rents are going up, so ROI’s are getting better, not worse.
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EGW
EGW
4 years ago
Reply to  Eddie_T
The ROI of a rental is not impacted by market fluctuations after the investment was made unless you plan on selling the asset at the current market price (but then is it really a rental?). Your rental income and expenses will impact ROI of course.
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Eddie_T
Eddie_T
4 years ago
Reply to  EGW
“The ROI of a rental is not impacted by market fluctuations after the investment was made”
It is if a rising market pushes taxes up….or if the mortgage rate is not fixed, and that goes up. That depends on what kind of liability you take on. Is is a 30 year FRM? Is it a fixed rate with a balloon? Is it an ARM?
What you’re saying is only correct if expenses stay the same, if taxes stay the same, and if you hold the same property and don’t do 1031 exchange to lock in gains in equity.
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Eddie_T
Eddie_T
4 years ago
Reply to  Eddie_T
It’s been a busy morning. I forgot to mention that refis also directly affect ROI on rentals, which is why investors refi at times like this. Are interest rate changes market fluctuations?  I think you could argue that they are…just on the liability side of things, not the asset side.
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shamrock
shamrock
4 years ago
I notice you don’t include interest rates in your CSAI calculation.  Interest paid on loans is definitely an expense so if they are lower it should subtract from the CPI and CSAI.
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Eddie_T
Eddie_T
4 years ago
“Is it any wonder there is so much financial speculation? “
You can call it speculation, but I would call it necessary and prudent hedging, if the borrowing at less than zero real interest can be used to acquire a tangible asset that has intrinsic value, that has some potential to keep up with the runaway inflation.
You have to compare and contrast it with, say, holding cash, or bonds, right? Or gold. Or bitcoin.
I still like houses at these prices, given the circumstances. Especially owning, at least, the house you live in…unless you live in some place like Danville or Pine Bluff.
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Pacioli
Pacioli
4 years ago
Reply to  Eddie_T
@Eddie Exactly right. Just because someone wants to say it is speculation over and over again does not make it so.
As you clearly articulate – it is prudent hedging given all other available alternatives. It’s how you invest in the real world.
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EGW
EGW
4 years ago
Reply to  Eddie_T
It’s speculation if people buy houses they can’t afford (eg. debt servicing cost is dangerously high vs their income). If people are buying houses because interest rates are low/they have an affordable monthly payment and plan on living there for a few years to build equity, then it’s a smart move.
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Jackula
Jackula
4 years ago
Reply to  Eddie_T
Sorry buddy, can’t put lipstick on this pig. It’s getting so bad plenty of folks are levering up buying real estate(less than 10% skin in the game) and not even bothering to rent them out. Going for a 200% return in a year.
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Eddie_T
Eddie_T
4 years ago
Reply to  Jackula
“plenty of folks are levering up buying real estate(less than 10% skin in the game) and not even bothering to rent them out”
I never suggested being stupid. You can’t fix stupid.Or stupidly greedy.
Leverage in residential RE can be safer than leverage in any other market I can think of, if it’s done right….but people who use too much leverage always have their butts handed to them sooner or later.
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Captain Ahab
Captain Ahab
4 years ago
We are witnessing a textbook example of crowd mentality, driven by the Fed. 2002-2010 was the same way, only less impactful. When this bubble pops, not much will be safe. All those negative-real-rate fixed-rate 30-yr mortgages will plummet in value.
The alternative is regression to the mean is no longer a valid construct.
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Eddie_T
Eddie_T
4 years ago
It’s clear there needs to be something better than OER, which is a sort of silly metric that will always distort CPI to the low side. They should come up (at least) with an accurate measure of rent costs, if they want to leave house prices out of it.
OER is going to be more and more wrong, as inflation gets worse, too. Owners are mostly locked in for 30 years.. How could they know what their equivalent rent would be? It’s a guess, with the decked stacked against them when they make it.
But if the Fed wants to deliberately understate inflation for political reasons, I suppose OER works great.
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whirlaway
whirlaway
4 years ago
And yet, gold and silver and the PM mining stocks keep tanking every time some Fed official hints that the money printing may come down from 120B to 110B a month sometime next year…
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Captain Ahab
Captain Ahab
4 years ago
Reply to  whirlaway
The demand is there in one area–central banks are buying metal.  FOMO is affecting the crowd, and Covid recovery has taken off the pressure. IMHO, this is when patience is essential.  The BIG assumption has always been the FED will continue to prop up the markets ‘to infinity’, which merely shows the Fed is scared stiff of the outcome on not propping.
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Eddie_T
Eddie_T
4 years ago
Reply to  Captain Ahab
When the pendulum swings back to gold I think it will swing hard. Maybe not as hard as the Schiffs and Rickards of the world think….but hard enough.
But some things need to happen. Stocks need to correct first. The bitcoin bubble needs to pop. Inflation needs to start to inflict noticeable pain. 
I’m going to see Dan Amerman speak in a couple of weeks. I’m very interested in what he thinks about gold now.
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TexasTim65
TexasTim65
4 years ago
Reply to  Eddie_T
Let us know what he says.
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TexasTim65
TexasTim65
4 years ago
Reply to  whirlaway
One thing you have to consider is that if you live in America, the gold price doesn’t appear to have moved much since 2010 because the US dollar has remained strong. But if you live elsewhere it looks a lot different. See this link and under the chart change the time to last 10 years and the money from US to another currency.
In US dollars it looks flat (1800ish to 1800ish today)
In Canadian dollars its gone from 1800ish to 2200 with a spike to 2700 last year
In British pounds its gone from 1100ish to 1300ish with a spike to the mid 1500s last year
In Euros it mimic’s the British pound
Unfortunately demand remains weak from investors (both institutional and individuals). Probably because you can get better returns elsewhere (stocks, real estate) with less tax implications (esp here in the US where it’s taxed at 28% as a collectible).
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Casual_Observer2020
Casual_Observer2020
4 years ago
Reply to  TexasTim65

Interesting. It tells me demand for dollars has stayed high and people trust their own country’s currency less. Most black money is also in dollars. No one can afford for the dollar to become worth less. 

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Eddie_T
Eddie_T
4 years ago
Reply to  TexasTim65
Bitcoin is a huge part of it, imho.
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Karlmarx
Karlmarx
4 years ago
Reply to  Eddie_T
Agreed – Bitcoin is similar to gold in that it is only worth something because people think it is worth something (both are ponzi schemes in my opinion).  That said, a lot of the demand for gold has been replaced by crypto currency demand for much the same reason as people purchased gold.  Also the transaction costs are much lower for the cryptos.    Then again, with gold, the government has a hard time taking it from you and its good to have when you need to escape from tyranny.
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Steve_R
Steve_R
4 years ago
Reply to  Karlmarx
Most people do not understand blockchain, the best thing to do to understand it is to find out how many projects are on each coin. (Imho) This is not going away anytime soon, it is just getting started. Most banks, Goldman etc, want to create their own etf(s) cryptocurrency, that should tell you something. 
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Eddie_T
Eddie_T
4 years ago
Reply to  Steve_R
The biggest problem for blockchain is one coin. BTC.  
BTC is such a large part of the crypto market cap that good coins get smashed when it tanks, and they almost never go back up as fast as BTC does when it turns up, because they aren’t the speculative vehicle BTC is.
It remains to be seen what would happen to decent coins if BTC weren’t there. If the BTC bubbles REALLY pops, it’s going to take long time for alts to shine again. jmho.
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Steve_R
Steve_R
4 years ago
Reply to  Eddie_T
ada up almost 100% eth about the same, dot 2x, sol, 3x, sorry do not understand what u are talking about???
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Steve_R
Steve_R
4 years ago
Reply to  Eddie_T
Bitcoin found support at 28000, the big institutions came and bought it, this is not something just in the US, Cryptos r us or invest answers are great sites for blockchain. Best to you Eddie_T
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TexasTim65
TexasTim65
4 years ago
Reply to  Karlmarx
Actually I’d argue that you have it backwards.
If you were trying to escape tyranny in Afghanistan do you think it would be easier to leave get into the airport carrying say 2-3 lbs of gold (20-30 or so coins) or have it all in bitcoin with the keys temporarily online until you left the country and could put them back into cold storage? I imagine anyone trying to flee with gold on their personage had it stolen. Bitcoin is much better to have when you need to leave the country.
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Karlmarx
Karlmarx
4 years ago
Reply to  TexasTim65
im not sure that a taliban fighter would be interested in giving you passage for a promised bitcoin.  Might do so for a maple leaf
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ColoradoAccountant
ColoradoAccountant
4 years ago
Reply to  Karlmarx
Gold is one of the 3 best conductors of electricity and the only one that doesn’t corrode.  It is used on the shields of our astronauts.  The reason you don’t wire your house with it, is it is expensive.
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tbergerson
tbergerson
4 years ago
Reply to  whirlaway
Gold correlates pretty closely to Real Rates (ceteris paribus, which may not hold).  Not many people use the house price adjusted real rates, though it is certainly an interesting concept.  Right now TY is holding around 1.30%.  Inflation is anyones best guess.  If TY makes another run down, as people like Lacy Hunt expect, GC will break away from this 1800 gravity point it has been fluctuating around since the June Fed meeting that put lessening of accomodation on the table.  And the break will not be downward
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