Kicking off 2022, the Case-Shiller home price index continues the record pace of 2021.
Home Prices Disconnect From Rent and OER
Case-Shiller home price data and CPI data via St. Louis Fed, chart by Mish.
This article was originally published by Mish Talk.
Home Price Disconnect Notes
- National is the Case-Shiller national home price index.
- 10-City represents the weighted average of the cities in the first chart.
- CPI is the Consumer Price Index
- OER stands for Owner’s Equivalent Rent. It is the single largest component in the CPI with a current weight of 24.151% of the total CPI.
- Rent of Primary Residence is a CPI component with a weight of 7.374% of the CPI.
OER is the mythical price the Bureau of Labor Statistics (BLS) says one would pay to rent one’s own house from oneself, unfurnished, without utilities.
CS National, Top 10 Metro Percent Change From Year Ago
Percent Change From Year Ago Notes (January 2022)
- CPI: 7.48%
- OER: 4.09%
- Rent: 3.76%
- Case-Shiller 10-City: 17.52%
- Case-Shiller National: 19.17%
CPI Understated?
Yes, by a lot.
I do not believe OER is only up 4.09%. Nor do I believe rent is only up 3.76%.
Moreover, home prices are not directly in the CPI, only OER and and Rent.
CPI vs Case-Shiller Adjusted CPI
CPI data from the BLS, the adjusted CPI is a Mish calculation
Adjusted CPI Discussion
My Case-Shiller adjusted CPI is calculated by substituting the percentage change in the Case-Shiller national index for OER in the CPI.
The result is an adjusted annual CPI rise of 10.29%. That’s a new record high for this data series.
There is a lot of controversy over this procedure. The BLS and many economists will point out that houses are not a “consumer” expense but a “capital” expense.
That’s technically accurate except historically home prices used to be in the CPI so historical comparisons are a bit distorted.
The problem with being “technically” accurate is that it is a huge mistake by the Fed to ignore asset bubbles. Inflation matters, not just alleged CPI inflation.
This historical distortion never mattered much in practice because the second chart shows OER, the CPI, rent, and home prices all rose in sync.
Real Interest Rates
CPI data from the BLS, the adjusted CPI is a Mish calculation
Real Interest Rates Discussion
One can calculate “real” (inflation-adjusted) interest rates by subtracting the rate the Fed charges from CPI measures.
The Fed charges 0.8%, mortgage rates had been around 2% in January but have since soared so one could formulate another version of “real” based on mortgages.
No matter how you slice it, rates are amazingly low. With home prices up 19% but the Fed Funds Rate at 0.08% in January and mortgages now only 4% or so, it’s no wonder we have another housing bubble and bubbles in equities.
The Fed wanted higher inflation and finally got it in spades.
Why the Inflation Surge?
- Three rounds of fiscal stimulus, two by Biden and one by Trump
- Supply chain disruptions
- Massive change in consumer preferences from services to goods
- QE finally mattered
- War – Not reflected in these charts as home price data only through January
1: Fiscal Stimulus
There were three rounds of fiscal stimulus, the last two of which were unwarranted in size and scope.
In addition to direct fiscal stimulus, Trump initiated and Biden twice extended evictions. Many people made no attempt to pay rent and instead spent that money
2: Supply Chain Disruptions
Supply chain disruptions erupted due to Covid-19.
3: Massive change in consumer preferences from services to goods
As a result of Covid consumers stopped eating out, going to the gym, going to movies, reduced haircuts etc. Instead they needed home offices, new computers, etc.
QE Finally Matters
Thanks to the Fed’s QE policy, the stock market made an enormous bubbles.
The bubble wealth effect led people chasing homes regardless of price. And a huge wave of boomer retirements from those feeling wealthy increased the labor shortage.
Poor Measure of Inflation
The big problem the Fed failed to see is that the CPI is an extremely poor measure of inflation.
I assure you inflation matters, not just alleged consumer inflation.
The Fed missed a huge jump in inflation because it does not know what to look at.
Biden and Inflation Go Hand in Hand
Lumber futures courtesy of the Nasdaq, annotations by Mish.
CPI Up Most in 40 Years
For more on the CPI, please see Consumer Price Index Jumps to 7.9 Percent, Another New Four-Decades High.
That CPI report is as of February. Home price data lags.
Alleged “Benefits of Running the Economy Hot”
Finally, recall that Charles Evans, president and chief executive officer of the Chicago Fed wants to run the economy hot.
For discussion, please see Chicago Fed President Praises the “Benefits of Running the Economy Hot.”
