Home Prices Have Peaked, It’s The Data That Lags

The Case Shiller home price index hit new highs across the board in the latest report for April. In practice, home prices have started to fall.

Home Prices Disconnect From Rent and OER

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 (April 2022)

• CPI: 8.26%
• OER: 4.79%
• Rent: 4.46%
• Case-Shiller 10-City: 19.66%
• Case-Shiller National: 20.39%

CPI Understated?

Yes, by a lot.

Home prices are not directly in the CPI, only OER and and Rent.

And rent prices are up much more than the BLS claims because rent price lag as well.

Three Measures of Inflation

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 11.18%.

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

Real Interest Rates Discussion

One can calculate “real” (inflation-adjusted) interest rates by subtracting the rate the Fed charges from CPI measures.

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 over 20% but the Fed Funds Rate at 0.33% in April, 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?

1. Three rounds of fiscal stimulus, two by Trump but a massive one by Biden
2. Eviction moratoriums enabled spending demand elsewhere
3. Supply chain disruptions
4. Massive change in consumer preferences from services to goods
5. QE finally mattered

The War is barely reflected in these charts as it began in February of 2022.

Poor Measure of Inflation

The big problem the Fed failed to see is that the CPI is an extremely poor measure of inflation.

Inflation matters, not just alleged consumer inflation.

The Fed missed a huge jump in inflation because it does not know what to look at.

Case-Shiller Lag and the Rear View Mirror

Case-Shiller home price data is a three-month average of prior closed sales. And those sales reflect deals made a month or two earlier.

Home Prices Have Peaked

Big discounts are happening in many markets already. And existing home sales data off which Case-Shiller is based has been very weak.

For discussion please see Existing Home Sales Skid Another 3.4 Percent in May, Down Fourth Month

Ignore the fact that median sales price levels are still rising. The proper comparison is repeat sales of the same home, which Case-Shiller does.

However, due to the lagging nature of the data, it may still be a few months before the index peaks.