Case-Shiller Home Price Index Levels
Here We Go Again
The Case-Shiller Home Price indexes (a measure of repeat sales of the same house) show that home prices are more extended now than ever before.
Those price levels are from December 2020.
Not Understanding Inflation
On February 10, Jerome Powell gave a speech on Getting Back to a Strong Labor Market
In his speech, Powell said the Fed “will likely aim to achieve inflation moderately above 2 percent for some time in the service of keeping inflation expectations well anchored at our 2 percent longer-run goal.”
On February 24, Powell Dissed Inflation and Ignored Questions From Congress About Leverage
On March 4, I commented Powell Confirmed Easy Money Until the Cows Come Home.
Meaning of Stable
But why 2%, not 1% or 0%? Certainly 2% is not “stable” by any reasonable definition.
Regardless, to make up for past inflation allegedly being lower than 2% Powell repeated his pledge to let inflation run above 2%.
Is inflation lower than 2%? As measured by the CPI, it is. But the CPI is a terrible measure of inflation.
It ignores all asset bubbles, it ignores housing prices, and it seriously underweights medical expenses.
Medical Expenses
The CPI seriously underweights medical expenses by averaging in Medicare and Medicaid.
Healthcare services make up 17.75% of the PPI but only 6.97% of the CPI.
Ask anyone who buys their own medical insurance how fast rates are really rising.
For discussion please see Healthcare is the Biggest PPI Component With Over 3 Times Energy’s Weight
With that, let’s return our spotlight to housing.
Housing Disconnects From Rent and the CPI
Prior to 2000, home prices, Owners’ Equivalent Rent (OER), and the Case Shiller national home price index all moved in sync.
This is important because home prices directly used to be in the CPI. Now they aren’t. Only rent is. Yet, OER is the single largest CPI component with a hefty weight of 24.05% of the entire index.
The BLS explains this away by calling homes a capital expense not a consumer expense.
However, that explanation ignores easily observed and measurable inflation. And it’s inflation, not alleged consumer inflation, that is important as the following charts show.
Percent Change From a Year Ago Comparison
Year-over-year, the CPI is only up 1.4%. The OER is up 2.0%, but the Case Shiller National Home Price Index (December) is up a whopping 10.3%.
If we substitute actual home prices for OER in the CPI (as the CPI used to be calculated), the next chart shows what the CPI would look like.
I call the substitution Case-Shiller CPI (CS-CPI).
CPI, CS-CPI Year-Over-Year
The BLS says the CPI is up only 1.4% from a year ago.
However, the CS-CPI has been running between 2% and 3% for the past three years and most of the past seven years. By this measure, the Fed has already achieved its goal.
Yet, the Fed is holding rates near zero and has pledged to remain that way.
We can calculate “Real Interest Rates” by subtracting measures of inflation from the Fed Funds Rate.
Real Interest Rates
Thanks to the Fed slashing interest rates to near-zero, real interest rates are -3.45% as measured by CS-CPI but “only” -1.31% as measured by the CPI.
Third Great Fed Mistake
Brian McAuley comments This Era May Come to Be Remembered as the Federal Reserve’s Third Great Mistake
With the real interest rate at -3.45% is it any wonder speculation in stocks, junk bonds, and housing are rampant?
This is the same mistake the Fed made between 2002 and 2007 when it ignored a blooming housing bubble with dire consequences culminating in the Great Recession.
BIS Study on CPI Deflation
Note that a BIS Study finds that routine consumer price deflation is not damaging in the least.
Specifically, the BIS concludes “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive!”
Worst of all, in their attempts to fight routine consumer price deflation, central bankers, led by the Fed, create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations.
Mish
I personally can’t wait for the catastrophic failure of residential real estate. I am in all cash right now and hope to pick up many homes, when thos that have way overpaid can’t keep overpaying. Wringing my hands now and salivating. Prices Up 20% in my state in just one year. Tje.most ever! I love when people have memory loss. ie what happened in 2009? I forget. Last time at bottom of bubble I made bank now at top of bubble I made bank. COME ON BUBBLE BREAK BREAK
The market is dependent on intervention. Folks may absolutely HATE that fact but we crossed the Rubicon well over a decade ago. Monetary systems have a shelf life…this one is long in the tooth and the patient’s life is now dependent on this intervention …the patients life being household balance sheets, Pension system solvency…you know national security issues. IF you hate this so much that you don’t want to see the NEED of continued intervention then you are really brilliant. I find when i bury my head in the sand…great things usually happen.
The fed has built a mountain of asset appreciation on intervention….record low rates…gigantic balance sheet growth and now they have a massively levered up market …and interest rates (bond yields ) climbing quickly. One could argue Powell testimony over the last couple weeks has actually encouraged the monster liquidity in this market to gather in to SHORT long bonds. Investors love to Front run the fed, and they are hesitant to fight the fed. So Powell….(either trying to let froth out of market) or not quite getting this….says to market …why don’t you take all that leverage and short the long bond….i am going to sit on my hands for a while…no worries. So …the market..always searching for Alpha sends a tidal wave of TLT shorts to make some low risk alpha returns. Powell and the ECB seem to want to act in sink and it will be entertaining to watch the continued shorting of Long bond yields chaotically attack the equity markets until they make Powell eat his words….and it seems like he won’t act forcibly enough to make a difference. I just wonder at what level the shorts are looking for in the 10 year….2.0% they will push it by the end of April if not sooner.
What is the SPX equivalent for a 10 year that Powell encourages shorts to push to 2% in search for alpha as he promises to sit on his hands….
The funny thing is those who don’t realize the Market needs constant intervention not to implode.
The Fed’s real mistake (when you understand the dire circumstance of that former point) is rising bond yields world wide and the rate at which they are climbing and how quickly they can unwind equity markets that are levered long. Powell says rising rates are a sign of confidence (market takes this as please lever up on tsunami of liquidity and short long bonds to the moon …i will be sitting on my hands) Get the heck out of equities until this blows over. Fed is going to need to intervene …first they need to say they stand ready to keep borrowing costs accommodating to facilitate more traction on recovery…see market response and adjust accordingly…the ECB will move in lockstep and they can achieve a further kicking of the can…which allows governments to run large deficits…and bond yields to stay depressed so asset values keep households solvent. IF you have not realized we crossed the Rubicon many moons ago with regard to letting the market “sort it out” then you are not doing anyone a service by giving them advice. There can never be normalization without a global reset of capitalism and one is coming ….it’s just whether we want to kick the can for a while longer….that world is preferred.
You can keep them, we have their puppets Adrian Orr and Grant Robertson doing the Fed’s bidding precisely as instructed. Our houses are up over 20% for the year, median approaching 900k (650k usd), with median income around 50k. Criminal!
I have one rental unit at the lake, on my boat storage property, It just got vacated. It’s the only house I personally manage, because my management company in Austin won’t touch anything that far out of town.
Got to take the dogs and drive out this morning for the walk-through. Nice spring day here. Nothing to remind me of the great storm except for a lot of dead plants in my yard that will take years to replace or nurture back to health.
I already got a call from somebody wanting to rent it. At the lake, the grapevine news does my advertising for me. lol.
Have fun.
You are the MAN!
Recipe for a Booming House Market:
Take
2.73%, for 30 year fixed rate from Freddie Mac
Add:
Housing inventories down 23% to a record low
Add:
Pandemic that keeps most people working but not spending
Put in oven for 9 months
Take out of oven and pour 2 trillion Dollars over it
Do not let cool and eat it hot
Another inflation anecdote.
I just sat down with a very young banker to open an account to dispense my PPP-2 funds…I like to keep these bail-outs in dedicated accounts for tracking. He related that he and his wife are closing on their first house, out in the burb where I practice.
They had to pay $100K over the asking price (of $325K) to secure their first home. I was blown away. I do feel for these kids trying to service that kind of debt….but I know that over time that the mortgage leverage and the amortization leverage will still allow them to build a lot of wealth, so I think they are making a wise decision.
People don’t buy houses because houses are a good deal They buy houses to raise a family. Life goes on.
I feel about a half-million richer than I did at breakfast..
OT: The dollar topped at 92.19 after showing real strength yesterday.
It looks ready to ease off now….which is what I expected…gold is trying to bounce off support. 1700 got breached slightly yesterday, but the 1690-1700 level seems to be the new support.
The 10 Yr Treasury Bond spiked al the way up to 1.614, but is now also easing. This sets gold up for a bounce, but it’s tepid so far
The Dollar is looking nice.
Mish I found a link to that great short story ….. you don’t have to even trek to the library !
Seems the inflation is concentrated in suburban homes. Not inner city homes. People are fleeing the insane inner city governments.
I’ve got the story for Mish (re “I don’t read much except about finance”)
It’s “A Deal In Wheat” by Frank Norris … all about two Chicago wheat traders, as they decimate the common man ….. The conclusion:
“He had seen the two ends of a great wheat operation- a battle between Bear and Bull. …. The farmer- he who raised the wheat- was ruined upon one hand- the working man- he who consumed it- was ruined upon the other- But between the two, the great operators, who never saw the wheat they traded in, bought and sold the world’s food, gambled in the nourishment of entire nations, practised their tricks, their chicanery and obliquely shifty “deals”, were reconciled in their differences, and went on through their appointed way, jovial, contented, enthroned, and unassailable.”
This post could be about any time. The Fed’s measure of inflation has always been an issue. What has changed? Seems like this is an old issue and not a new one.
I think it’s fair to say the Fed system is a failed model. Yes, we need a central bank. No, it should not be captured for and by the finance industry.
I’ve been wondering what real interest rates are currently, thanks Mish for the informative post. Everybody thinks inflation is coming so we are seeing a late 70’s style event, buy hard assets, especially real estate since rates are starting to rise, as fast as you can. This is not going to end well and Powell is no Volker. Next up operation twist.
Well it’s a brave new world all around.
Glenn Greenwald says Trump, Bannon and Tucker Carlson are the true socialists…“I would describe a lot of people on the right as being socialist. I would consider Steve Bannon to be socialist. I would consider the 2016 iteration of Donald Trump the candidate to be a socialist, based on what he was saying. I would consider Tucker Carlson to be a socialist.”
Whooda thunkit…the GOP knows even less.
The Intelligencer for sure doesn’t like Greenwald. Its article on him gets bogged down in trying to define socialist and fascist and generally failing at it because in my opinion these are terms are from the 19th and early 20th centuries when conditions were much different and are less relevant today. The terms Blue and Red and Green are much more accurate to us today because we know what they mean and what their central tenets are. Trying to describe present politics using terms from the 19th Century is very confusing.
You have a serious case of TDS.
FOMC must run purely on hope now, that the market monster can go one more year without throwing a tantrum.
“Housing disconnects from rent and CPI” is a very good statement of the separate concerns of the Fed. Its not inflation directly that they have to control, its the stink of inflation, its when it causes a problem. Its not inflation itself that forces their hand.
The trigger of the “inflation stink” is when it directly and obviously impacts the poor and their housing and consumption.
For everybody else, cheap loans in a rising markets hey music playing lets dance. So they can “look through” temporary spikes as long as the “temporary spikes” don’t stink.
That aside, it looks as though we are still post 2008 on the Von Mises cusp of either taking the pain and dealing with the debt or debasing the currency. Who knew it could go on so long..
I emailed Hunt today and he thanked me for the post. Otherwise, I have no new comments from him.
The low mortgage interest rates are causing insanity in the Los Angeles house market. I’m trying to buy a house but many of them are getting at least 10 offers and the winning bid is at 10%-15% above asking price. Hopefully the rising rates will help.
I hear the Baltimore area is like that too. comes on the market Friday, sold over list by Sunday. The couple I know have his mom as their agent and even she can’t get them into a house.
I also know NYC suburbs are similar also, have a nephew who bought a ‘starter’ home after a number of ask or over ask bids- not a great time to be a buyer.
“Now is a great time to buy.” — Lawrence Yun
Also Lawrence Yun: “Now is a great time to sell.”
Irrational exuberance only lasts so long.
I’ve tried to stay rational since 2007. At this point I think it’s going to make me crazy if I keep fighting the fed, so I’ve since given up. I’ve not rebalanced my portfolio, but most new money is going right into the casino, albeit mostly very boring, high dividend, low p/e (relatively) stocks.
If Jay needs some relaxation, here’s one fine book to read.
“They all had the politics of horse thieves. He believed in the Republic as a form of government but the Republic would have to get rid of all of that bunch of horse thieves that brought it to the pass it was in when the rebellion started.
Was there ever a people whose leaders were as truly their enemies as
this one?”
― Ernest Hemingway, For Whom the Bell Tolls
I love Hemingway, I need to read the rest of his work before I take the dirt nap. I like the four posthumous novels best….although For Whom The Bell Tolls is a very great book, and more famous.
Somebody mentioned Gertrude Stein…I like to recommend Hemingway’s A Moveable Feast, with Stein’s The Autobiography of Alice B. Toklas as a companion piece to be read along with it.
“If you are lucky enough to have lived in Paris as a young man, then wherever you go for the rest of your life it stays with you, for Paris is a moveable feast.”
My artist friend came for an appointment yesterday. She wants us all to do another barge cruise in France…..maybe Burgundy this time. I hope we can soon.
Read them all. The Nick Adams stories reminded me of the times I passed in Upper Michigan when I was a kid (romanticized of course).
I have several left to enjoy…and I’ve even thought about trying to buy a signed first of one of the lesser loved books….but even they are quite expensive anymore. I most recently read The Garden of Eden….
I wonder what Mish’s literary tastes are. I am tempted to speculate.
I don’t read much except about finance
Watch almost no TV
Too busy with my blog, hiking, and photography
Your hard work was worth it. Your blog is excellent as well as the pictures you posted a while ago.
I’ve only read Old Man and the Sea and A Moveable Feast.
I like Hemingway and would like to read some more. What would you recommend as the next couple of books to read?
Hard to beat The Sun Also Rises and A Farewell To Arms. Those are the classics most people love.
If you want to read about Africa and hunting Read True At First Light. If you want to read about boats read Islands In The Stream.
One of my old sailing buddies spends his summers now on a little island in northern Michigan that his wife inherited. I hope to get up there sometime. Never been..
Oops, meant that one for Doug.
I believe Hemingway said that you should read only very good books and very bad books and nothing between.
One of my daughters lives on Lake Champlain in Vermont. She loves it there.
I’d recommend reading any collection of Hemingway’s short stories. Most of his novels are quite good but his short stories are superlative and really is what defines Hemingway. In Our Time is a good place to start. I highly recommend reading all the Nick Adams short stories.
Hemingway’s first three novels are unmatched in literature- The Sun Also Rises, For Whom The Bell Tolls, and A Farewell To Arms.
His entire short story collection is superb- available now on the internet. I believe The Snows Of Kilimanjaro and The Short Happy Life Of Francis Macomber are two of the best short stories ever written. And a truly self-busting autobiographical insight by Hemingway.
The only thing I am more sick of than hearing Trump’s mouth all the time- is hearing Jay Powell tell us how concerned he is for all of our welfare.
He’s the richest Fed chairman in history, $50 million and counting, and he cares less than zero about the average person. Just like the 0 % interest rates he’s planning.
Go to New Zealand, will you Jerome ? And take Yellen with you. We’ll fix the mess you made here much quicker without either of you in the country.
WE don’t want Powell or Yellen here in New Zealand. We already have our own central bank muppets.