Factoring in home prices, real interest rates hit a new record low in a series that dates to 1987.
Case Shiller released home price data on Tuesday. The National home price index jumped 19.7% from a year ago setting a new record for the series.
CS National, Top 10 Metro ,CPI, OER Percent Change
- The National home price index rose 19.7% 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 19.16% from a year ago but still under the housing bubble peak of 20.5%.
- According to the BLS, rent was only up 1.91% 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 2.43% year-over-year.
- The CPI for July was up 5.37% from a year ago.
Case Shiller Home Price Index National and Top 10 by City
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 24.26%.
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: 8.82%
- 10-City Metro: 8.69%
- CPI: 5.37%
Real Interest Rates
Explaining Financial Speculation
The Effective Fed Funds rate for June was 0.08%. For July it was 0.10%. For August it was 0.09%.
The above chart shows the Fed Funds Rate minus the CPI and the Case-Shiller Adjusted Inflation Rates. Not that it matters, but I inadvertently used June making the real interest rate -8.72% not -8.74%.
Real interest rates on an adjusted basis are about -8.7%. 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 19.7%.
Is is any wonder there is so much financial speculation?
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