Real Interest Rates Are More Negative Now Than In the 2004-2007 Housing Boom

By U Cast Studios
June 24, 2021

Real Interest Rates Are More Negative Now Than In the 2004 2007 Housing Boom
Image Courtesy Of Mish Talk

Fueled by negative real interest rates, the Fed has blown another housing bubble.

This article was originally published by Mish

Meaning of Real

Real means inflation adjusted. But what is the best measure of inflation?

Home Price Not in the CPI

Home prices are not in the CPI. They should be. Economists generally disagree with me, but what good is a measure of inflation that excludes key prices?

The CPI ignores housing prices, what corporations pay for health insurance on behalf of consumers, what Medicare, and Medicaid pay for healthcare on behalf of consumers, stock prices, bond prices, speculation in cryptos, and only looks at the prices of so called “consumer goods”.

Q: How relevant is the CPI as a measure of inflation?
A: Not very if at all.

The Fed has ignored those things at its peril.

The result was:

  1. A DotCom bubble and a DotCom crash
  2. A housing bubble and a housing crash
  3. An even bigger bubble now

Capital Expenses 

The reason economists ignore housing is they view it as a capital expense. So what? Are we measuring prices or just the ones that allow bubbles to be easily blown?

It’s not possible to include prices such as stocks in the basket because they vary with earnings, but repeat sales of the same house and medical expenses are a different matter.

Personal Consumption Expenditures (PCE), the Fed’s preferred measure of inflation does take medical prices into consideration, but at the expense of even greater housing distortions.

What the Chart Shows

The standard measure of “real” is made by subtracting year-over-year CPI from the Fed Funds Rate or 1-month T-Bill.

Given that the Fed Funds rate is 0.06% and the year-over-year CPI increase is 4.99% the real interest rate is -4.93%.

But that does not include housing. The BLS housing component includes rent of primary residence weighted at 7.86% and OER weighted at 24.26%.

OER stands for Owners’ Equivalent Rent. It is an estimation of what homeowners would pay in rent if they rented their own house, from themselves, unfurnished, without utilities.

I calculated the CS-CPI by substituting actual home prices as measured by Case-Shiller for the OER component.

Most Negative Rates in Series History

  • Real CS-CPI National: -6.49%
  • Real CS-CPI Top-Ten: -6.72%

Both numbers are deeper into negative territory than in the housing bubble years.

The Case-Shiller housing data goes back to 1987. Year-over-year calculations start in 1988.

CS National, Top 10 Metro, CPI, OER 

CS National Top 10 Metro CPI OER 2021-03

Home prices are up 111 consecutive months through May. The most current Case-Shiller data is from March.

To use CPI data through May, I replicated March Case-Shiller data for April and May.

Given further housing price increases, it’s safe to assume that real interest rates are deeper than -7.0%.

CS National, Top 10 Metro, CPI, OER Percent Change

CS National, Top 10 Metro Percent Change as of 2021-03

The BLS says OER is up a mere 2.11% from a year ago. Not counting home price increases in April and May, the 10-City Case Shiller index is up 12.40% and the National index up 11.48%.

 Case Shiller Home Price Index National and Top 10 by City 

Case Shiller Home Price Index National and Top 10 by City 2021-03


Yesterday, I gave Congratulations to Chicago and Las Vegas, the Only Major Cities Whose Home Prices Have Declined Since 2007.

Those are not median prices. Case-Shiller data reflects repeat sales of the same house over time.

Case-Shiller 10-City Percent Change

Case-Shiller 10-City Percent Change 2021-03

Measuring the CPI

The above chart brings up another issue with measuring the CPI, extreme price variations. And the issue applies to many things, especially housing, health care, and education.

Those in college experienced rapidly escalating tuition. Those not in college pay no college tuition at all. Try telling kids in college that education is only 3.03% of their expenses and see what they say. But that is what the BLS says.

The BLS takes all of the price data, weights it, then averages it all together, thereby dramatically undercounting inflation for everyone in college as well as everyone who buys their own health insurance. On top of it all, the BLS ignores housing as discussed above.

Target Silliness

The Fed then takes these absurd BLS measures of inflation, then decides for no explained reason that “on average” inflation should be 2%.

I have news for the Fed: 7% is far better measure than whatever the hell they are looking at.


The Fed defends its actions in the name of “price stability” and actually wants to boost inflation even more to make up for inflation that was allegedly too low for years.


Housing and speculation are all the Fed has. And part of housing is speculation including FOMO, fear of missing out.

Zoomers prefer to call it YOLO. You only live once. On the YOLO theory, Dogecoin is a great buy.

Perhaps Dogecoin goes to $5. If so, hooray. If it goes to zero, so what? It’s YOLO. There’s always something else to speculate in and make up losses.

That is what the Fed is encouraging, either on purpose or out of ignorance.

Take your pick, but the result is the same: Cheap money encourages speculation in assets.

Real Hourly Pay

Despite wage increases, Real Hourly Pay Is Losing to Inflation. “Real” in that link means a 5% inflation adjustment not a 7% adjustment as calculated above.

The Fed and the Bank of China Both Act to Punish Savers

Inquiring minds may wish to consider The Fed and the Bank of China Both Act to Punish Savers

The Fed’s explicit inflation policy is nothing other than financial repression of the poor for the benefit of asset holders (the wealthy).

Sadly, people in the US are likely to say “Look at what China is doing to its people” without stopping to think the Fed is doing the same damn thing.

End the Fed

I have many time proposed ending the Fed.

I am often asked “Replace the Fed with what?” The answer is “Nothing”. We do not need a group of charlatans who would not recognize “inflation” if it jumped up and spit grapefruit juice in their eyes.

The Federal Reserve was created on December 23, 1913.  From 1776 until 1913 there was no Fed.

We need sound money, not the Fed whose goal is to destroy money at the rate of 2% a year to the guaranteed detriment of the poor and middle class.

Understanding What’s Going On

Bubbles Bust

The Fed says inflation is transitory. The Fed is correct but for a hugely wrong reason.

Inflation is transitory because the Fed itself has sown the seeds of another economic collapse.

Speculation eventually dies out. All bubbles burst. When that happens, the result is anything but inflation.

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