Close X Cookies are necessary for the proper functioning of 24hGold.com. By continuing your navigation on our website, you are accepting the use of cookies.
To learn more about cookies ...
EnglishFrench
Gold & Silver Prices in
In the same category

Dissecting the Fed-Sponsored Housing Bubble; HPI-CPI Revisited; Real Housing Prices; Pri

IMG Auteur
Published : January 31st, 2013
796 words - Reading time : 1 - 3 minutes
( 0 vote, 0/5 )
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
0
comment
Our Newsletter...

In the wake of rising housing prices a reader asked if I would revisit my March 2102 article How Far Have Home Prices "Really" Fallen.

The reader specifically wanted an update on inflation as measured by the HPI-CPI (a measure of the CPI where actual home prices instead of rent is the largest CPI component).

Here is some background on the request: The CPI does not track hope prices per se, rather the CPI uses a concept called "Owners' Equivalent Rent" (OER) as a proxy for home prices.

The BLS determines OER from a measure of rental prices and also by asking the question “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?

If you find that preposterous, I am sure you are not the only one. Regardless, rental prices are simply not a valid measure of home prices.

OER Weighting in CPI

OER has the single largest weight of any component in the CPI, at 23.957%.



Let's play "What If?" Specifically, "What if the BLS used actual home prices instead of OER in calculating the CPI?"
Home Price Data

Home price data in this post is courtesy of Lender Processing Services(LPS), Specifically the LPS Home Price Index (HPI).

I passed on an Excel spreadsheet of LPS HPI aggregate housing prices to Doug Short at Advisor Perspectives and he produced the following charts.

Notes

  1. Click on any chart to see a sharper image
  2. Current data is as of November
  3. Annotations in purple by me


Let's start with a look at the rate of increase in home prices vs. the rate of increases in OER.

Comparative Growth in HPI vs. OER



From 1994 until 1999 there was little difference in the rate of change of rent vs. housing prices. That changed in 2000 with the dot.com crash and accelerated when Greenspan started cutting rates.

The bubble is clearly visible but neither the Greenspan nor the Bernanke Fed spotted it. The Fed was more concerned with rents as a measure of inflation rather than speculative housing prices.

Fed Funds Rate vs. CPI and HPI-CPI



The above chart shows the effect when housing prices replace OER in the CPI.  In mid-2004, the CPI was 3.27%, the HPI-CPI was 5.93% and the Fed Funds Rate was a mere 1%. By my preferred measure of price inflation, real interest rates were -4.93%. Speculation in the housing bubble was rampant.

In mid-2008 when everyone was concerned about "inflation" because oil prices has soared over $140, I suggested record low interest rates across the entire yield curve. At that time the CPI was close to 6% but the HPI-CPI was close to 0% (and plunging fast).

As measured by HPI-CPI real interest rates were positive from mid-2006 all the way to 2010, even when the Fed Funds rate crashed to .25%. That shows the power of the housing crash.

Real rates went positive again in mid-2010 until early 2011.

CPI and HPI-CPI Variance From Fed Funds Rate



The above chart shows the "Real" (inflation adjusted) Fed Funds Rate as measured by the Fed funds rate minus the CPI, and a second time by the Fed Funds Rate minus the HPI-CPI.

With the recent rise in housing prices, the HPI-CPI is 2.78% while the CPI as stated by the BLS is 1.76% (both numbers from November).

In my estimation, the BLS and Fed now understate price inflation by a full percentage point. Inflation as measured by expansion of credit is another matter.

Variance Between the CPI and HPI-CPI



The above chart shows the difference between the CPI and HPI-CPI. Note that the largest negative discrepancy marked the exact top of the housing market in summer of 2005.

Some suggest the top was in 2006. However, 2006 is too late.

Massive housing incentives such as "free garages", "free landscaping", "free trips", etc., etc. started in summer of 2005. So did fraudulent kickbacks to the buyer. "Official" prices did not reflect those incentives and kickbacks.

Moreover, condo prices in many areas crashed in summer of 2005 and condos are not in the home price indices.

How Far Have Home Prices Crashed?



In nominal terms, home prices are about where they were in mid-2003. In "real" inflation adjusted terms, this time using the CPI and PCE (personal consumption expenditures) as a measure of inflation, home prices are about where they were in mid-1998. What a crash!

Credits


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish

I am hosting an economic conference in April, in Sonoma, California. Please consider attending.
Click on Image to Learn More

<< Previous article
Rate :Average :0 (0 vote)
>> Next article
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
41 Facts about Central Banks no ...
19 Decsamking73
I'm not sure that much was taught about the central banking system back when I was in school...25 + years ago. At least not the important parts.
Gold & Silver Market Morning
19 Decend
If you trade XAU/RUB and have bought XAU using RUB, you should have closed your position as he advised. Then you should have switched, buying gold ...
Muslim terrorism, the left and t...
19 DecFirebear1
All please understand this person was a Muslim,that was his believe! His character was that of a criminal as was shown by his action on the day and...
Napoleon vs. Cheney: "Interrogat...
18 Decwalmarde
Torture just put the moral line lower. Lets think about American exceptionalism. What we want ? we want to spread and defend that exceptio...
Napoleon vs. Cheney: "Interrogat...
18 Decwalmarde
Utilitarianism is bad philosphy. I'm also very disgust about torture. It will backfire in our face. We are now no better than ou...
Napoleon vs. Cheney: "Interrogat...
18 DecJosu O.5
I cannot overstate how important is that every american read this article. It's absolutely wonderful how you have summarized every aspect around to...
Muslim terrorism, the left and t...
18 Decend0
Does anyone still wonder why is Australia hotbed for second generation Muslim migrant radicalization? Does anyone still need an explanation on why ...
Gold & Silver Market Morning
17 Decsamking731
Gypsie, my take on what he's saying is on paper gold, not actual gold that you are holding in your hand. In that way, gold is gold, though Pandas ...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS
Comments closed
Subscribe to 24hGold’s daily market briefing
  • Prices and data of precious metals in 119 currencies and world mining companies
  • Daily analysis of the economy, markets and more
  • Free, daily and indispensable
Stay informed, subscribe now !
* Your email will never be shared.