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

Factoring in home prices, real interest rates hit a new record low in a series that dates to 1987.
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CS National Top 10 Metro CPI OER 2021-07

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 

CS National Top 10 Metro CPI OER Percent Change 2021-07

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

Case Shiller Home Price Index National and Top 10 by City 2021-07

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%.

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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

CPI, CSAI National, CSAI Top 10 Metro Percent Change 2021-06

CSAI Comparison Measures 

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

Real Interest Rates 

Real Interest Rates CPI, CSAI 2021-06

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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