Case Shiller National and Top 10 City Home Prices – OER, Rent and CPI from BLSCurrent Case-Shiller data, released today, is through November. The rest of the numbers from the BLS reflect the same timeframe.OER stands for Owner’s Equivalent Rent. It’s the price one would pay to rent their own house from themselves, unfurnished, without utilities. November 2022 ComparisonCase-Shiller National: 7.69 PercentCase-Shiller 10-City: 6.31 PercentPrimary Rent: 7.91 PercentOER: 7.13 PercentCPI: 7.11 PercentFed Funds Rate: 3.78 PercentThat pretty much says most of what you need to know. As of November, the Fed was still far behind the curve by any reasonable measure.Let’s go through the math and my preferred measure of CPI that factors housing into the equation.A Better Measure of Inflation RationaleWe can calculate a better measure of inflation by substituting home prices for Owners’ Equivalent Rent in the CPI.OER is the single largest component in the CPI with a weight of 24.235 percent as of December 2022. The number changes slightly every month. The BLS used to have home prices directly in the CPI but abandoned the practice on the theory that homes are a capital expense, not a consumer expense. I put housing back in an alternate CPI because inflation matters, not just alleged consumer inflation. Also bubbles matter, as the Fed unfortunately has proved time and time again. Real Interest Rates CPI and Case-Shiller Real Interest Rates based off Fed Funds RateReal Interest Rate NotesThe Real CPI Interest Rate is the CPI minus the Fed Funds RateThe Real CSAI is formed by substituting the percentage rise in the National Case Shiller home price index instead of OER, then subtracting the Fed Funds Rate.Explaining the Housing Bubble and Great RecessionIn 2004, the Fed held its key interest at roughly 1 percent despite a roaring housing bubble. I calculate real interest rates of -2.24 percent based off the CPI and -4.57 by my preferred measure. By 2007, my measure or real interest rates went from -4.57 percent to +4.07 percent. Is it any wonder prices crashed and a Great Recession started?In 2020, the Fed the Fed fueled its already huge asset price bubble with reckless QE and entirely predictable results.Case-Shiller Home Price IndexCase-Shiller home price data via St. Louis Fed, chart by MishThis is precisely what happens when the Fed blows bubbles. Scroll to ContinueOne of my readers commented that substituting home prices for OER is a big nothing burger because you either own your house outright or have fixed mortgage payments that aren’t changing.
This is a very wrong view. The Fed created huge bubbles with long-term economic distortion and damage. The Fed also created big sets of winners and losers, also with huge economic damages in the future. This economic damage will last for many years. The Fed blew bubbles that it would not have (at least not as big) had it just taken home prices into consideration.Instead, the Fed woodenly look at the PCE price index which has an even smaller percentage of OER.Looking AheadHome prices are still stubborn because real interest rates are still negative.Also, we do not have the same extent of liar loans now as we did in in 2006-2007. Unless home prices collapse, the housing market will remain depressed because 30-year mortgage rates are still above 6.0 percent. It’s cheaper to rent with stubborn prices. As of now, real interest rates are still negative, but that will change in the next few months. Eventually the Fed will overshoot, but as long as home prices stay stubbornly high, it will be cheaper to rent at these interest rates.And if housing remains sluggish, don’t expect much from the economy.Home Prices Falling But Remain Very HighCase-Shiller home price data via St. Louis Fed, chart by MishFor more discussion of housing, and Case-Shiller prices, please see Home Prices Falling But Remain Very High, San Francisco Negative From Year AgoThis post originated on MishTalk.Com.Thanks for Tuning In!Please Subscribe to MishTalk Email Alerts.Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.If you have subscribed and do not get email alerts, please check your spam folder.Mish
