Housing affordability continues to soar out of reach of most buyers. Not only are prices at a new record level, mortgage rates remain slightly above 7.0 percent.
Chart Notes
- Case-Shiller measures repeat sales of the same price over time. It is the best measure of price, but it lags. Current data is as of April which reflects sales 1-3 months prior.
- The CPI, OER, and Rent of Primary Residence are all from the BLS.
- OER stands for Owners’ Equivalent Rent. It is the rent one would pay if they were renting instead of paying a mortgage.
Not Inflation?
Economists consider homes a capital expense, not a consumer expense. On that basis homes are not in the CPI. It’s a serious ongoing mistake.
Four Measures of Inflation Percent Change
I created the above chart by substituting home prices for OER in the CPI.
As of April. year-over-year PCE inflation was 2.68 percent, the CPI was 3.37 percent, the CS-Adjusted CPI was up 4.07 percent and the Case-Shiller 10-city adjusted CPI was up 4.49 percent.
Real Interest Rates
We can calculate real interest rates by subtracting inflation from the Fed Funds Rate.
Prior to the Great Recession, real interest rates were -4.58 percent creating the then-biggest housing bubble in history.
In response to Covid, the Fed slashed interest rates to zero and real interest rates plunged to a negative 11.27 percent. The bubbles you see in the lead chart are a direct result of terrible Fed policy.
Real interest rates are now a positive 1.26 percent, but that’s not close to the positive 4.07 percent that popped the housing bubble in 2007.
The Fed’s Big Problem, There Are Two Economies But Only One Interest Rate
On February 20, I commented The Fed’s Big Problem, There Are Two Economies But Only One Interest Rate
This post is an update but the Fed’s mistakes are the same.
Existing Home Sales Drop Slightly But Median Price Hits New Record
Existing-home sales declined 0.7 percent in May. It was the 22nd decline in 28 months. But the median price hit a new record.
On June 21, I commented Existing Home Sales Drop Slightly But Median Price Hits New Record
The NAR reports Existing-Home Sales Edged Lower by 0.7% in May as Median Sales Price Reached Record High of $419,300
Median prices do not reflect the number of rooms, square footage, amenities, or lot size. Case-Shiller is a better measure because it factors in all of those. But CS is a slower measure.
Where Do We Put 8 Million Illegal Immigrants?
On May 23, I asked Where Do We Put 8 Million Illegal Immigrants?
Millions of immigrants keep pouring in. New residential construction has stalled and multi-family construction is in decline. Completions are rising, but is that enough housing?
One of Every Five New York City Hotels is Now a Migrant Shelter
On June 2, I noted One of Every Five New York City Hotels is Now a Migrant Shelter
New York City hotel prices have never been higher. Illegal immigration is part of the reason why. Mayoral graft is another.
Don’t worry, LA has the affordable housing solution starting with “affordable housing units at $600,000 each to house 278 homeless out of 75,518 in the county.
Please note A New High-Rise Building Will House the LA Homeless in $600,000 Units
If the county were to shelter the 75,518 homeless, the cost would be $45,310,800,000. That’s $45.3 billion, excluding free property taxes, case workers, maintenance, utilities, insurance, food, police, clothes, doormen, or medical care.
And it would not stop there. Every homeless person in the state would move their tent to LA to participate.
This dear woke fans is what’s known as “affordable housing”.
Clearly, the proper solution is to do the same thing for 8 million illegal migrants. After all, free food, free clothes, and free shelter is a right.
More seriously, the economy is slowing on many fronts. But that slowdown has yet to impact home prices.
Nonetheless, weakness is pervasive and recession looking.
Job Openings vs Unemployment Looks Very Much Like a Recession Has Begun
For discussion, please see Job Openings vs Unemployment Looks Very Much Like a Recession Has Begun
Unemployment is rising and job openings have crashed. It looks recessionary.
Where to put 8 million illegals? How about Tierra del Fuego?
Nah. It’s still a pretty nice place there. Let’s keep at least one place in the world in decent shape, like the “tree sactuary” in the movie, Soylent Green.
Mike,
To what degree does OER which is a component of the various CPIs reflect the monthly sum of PITI? It seems to me that OER is the reflection of house prices into the various CPIs but you say that house prices aren’t reflected in the CPIs. What am I missing here?
Home prices 100% guaranteed are not in the CPI. They used to be. OER is the same as rent. The price, but not the weight is what a house would rent for if someone was to rent a house. ie. what would a house rent for if it was rented?
My calc substituted actual home prices (Case Shiller) instead of OER at the same percentage rate.
For a long time (lead chart), OER, rent, and the home prices all rose at nearly the same rate, so it did not matter.
Ignoring bubbles did matter. The Fed did not see them because they did not see home prices as inflation.
The Fed mistakenly does not see overvalued equities as inflation.
If you believe your financial advisor and the media, buying stocks is absolutely necessary for your “successful retirement.” A necessity that fits right in with food, shelter and fuel.
”
If you believe your financial advisor and the media, buying stocks is absolutely necessary for your “successful retirement.”
”
Translated directly from currently spoken Idiot dialect of Newspeak; that’s just stating that “successful retirement” revolves around making oneself a maximally dependent on The Fed and Junta. Hence a pliantly bent over sycophant for the illiterate ruling class driving the West right off a trivially obvious cliff with their idiocy and incompetenceand complete lack of anything else whatsoever.
Doesn’t make it bad advice on an individual basis, any more than felating Kim is bad advice for those similarly misfortunate to be born in that other shole.
Savings has been dissipated in financial investment and impounded in monetary savings (increasing the demand for money).
Lower the FHFA conforming loan limit by 30% to 40%, and the affordability crisis will end within months. Home prices would drop by 10% to 15%, maybe more.
C’mon Market, time to cut interest rates bigly and make all the non-inflated home prices affordable again! /sarc
C/S top 10 looks like QQQ 1M. Mortgages stay the same buy taxes, insurance,
energy and maintenance are rising. Rent on $1M house is 4% gross, before other expenses including inflation. Small landlord put $1m in tenants pockets for zero net returns. It might get worse when the boomer retire in a decade or two
Now.
Boomers are retiring right now.
Professional economists are stupid. Banks don’t lend deposits. The U.S. Golden Era in Economics was driven by the velocity of circulation, not money.
There are so many errors in the FED’s figures that no one can apply double-entry bookkeeping on a National scale anymore.
The banking system is a closed system. Banks create deposits when they lend/invest. The source of time deposits to the payment’s system, is demand deposits, directly or indirectly via the currency route or through the DFI’s undivided profits accounts.
Time deposits, e.g., negotiable CDs (savings-investment type accounts), rather than being a source of loan funds, are the indirect consequence of prior bank credit creation. And the source of bank deposits (loans + investments = deposits, not the other way around), can be largely accounted for by the expansion of Reserve bank credit.
That there is a close connection between aggregate bank credit and the aggregate volume of bank deposits can be verified by comparing the net changes in commercial bank credit to the net changes in total deposits for any given time period.
Yeah, I know. I need to take on another loan so as to provide money for other folks to make their monthly payments.
Banks don’t lend deposits, so the banks should be driven out of the savings business (opposite of the elimination of Reg. Q ceilings). This doesn’t reduce the size of the payment’s system.
Professional economists are myopic. I.e., all bank-held savings are lost to both consumption and investment.
Another measure dropped by the economic politburo is the increase is cost of a mortgage payment as a result of rising interest expense. This and home prices were a component of the CPI in the past.
In the pro-rata share of the price level (consumer’s apportioned basket of goods and services), not substantiated by the CPI or PCE, valuations depend upon Gresham’s law (indeed Gresham’s *bubble*).
“a statement of the least cost “principle of substitution” as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable.”
Which is why they want retirees to eat cat food.
A recession hasn’t begun. And housing is a consumer expense. Just ask anyone who has to move to get a better job. That stifles the employment figures. People aren’t as mobile and therefore wages and salaries are supported (and house prices are diminished).
The money #’s were released today. The rate-of-change in our “means-of-payment” money, (inside money supply), is still in positive territory (unlike Divisia Monetary Aggregates, who Barnett doesn’t know money from liquid assets).
The many faces of Joe Biden here. Take a little time to examine closely to see.
https://x.com/BK_Trump_1/status/1805259096058155258/photo/1
Big demand for homes @ 7%. Explosive demand and another $100k coming up when rates dip to 5%.
NAR says the annual rate is 2 million homes less than in 2021. Where is the big demand?
Agree, 5% would be a great incentive. Amazing how 5% feels like a great rate even though it would have seemed outrageously high just a few years ago.
Months/days of supply indicates demand, not number of homes sold.
Supply could increase as current owners feel less trapped.
Renters will decide this election
They decided last time. Didn’t work out at all for them.
Renters overwhelmingly went for Biden last time.
Let’s hope they’re not that foolish in the 2024 election,
Not like they have a better choice 🙁
Condo developer Trump will resume pressuring Powell to lower interest rates. Will this work? Dunno, but lower rates–> more housing construction–> higher supply. He’ll also drive down the flow of illegals over the border.
He may even get Congress to spend Federal dollars convert commercial office towers to housing, and revive city centers.
Higher supply of new/converted units, lower demand –> reduced pressure on rents.
Here I am anticipating improvement under Trump and I’m a Democrat–more precisely, a Bernie Democrat. I felt the Burn in 2016 and 2020, and still do. Many of us will sit out the election or vote for Jill Stein or Cornell West. That’s very bad news to Biden.