Housing Costs - Core CPI Recap

While wading through a week's worth of news reports and commentary in an attempt to determine what could possibly be added to the discussion of Ben Bernanke's nomination as the next Federal Reserve Chairman, we take a brief diversion to look back at the post from nearly two weeks ago, Home Ownership Costs and Core Inflation.

This generated a significant amount of interest and discussion, all starting with a simple question, "What would core inflation be for the last year if housing costs were used in place of the nefarious OER (owner's equivalent rent)"?

Using publicly available BLS data and some simple algebra, it was relatively easy to back out the 2.3 percent OER from the core inflation calculation and substitute back in the OFHEO housing price increase of 13.4 percent, yielding a shocking 5.3 percent rate. A rate almost triple the official BLS tally of 2 percent, a number that has been an affront to our sensibilities for some time now.

Next, a chart was created showing CPI, OER, and OFHEO house price increases since 1976, after which it became clear that there was really something of substance going on here, where housing costs had so markedly detached from their OER proxy in recent years. That chart is published again here with 30-year mortgage rates added. Note the two periods of flat interest rates and rising home prices - first in the 1990s when rates were in the 7-8 percent range, then the dramatic rise of the last few years as rates moved to around 6 percent and held steady there.


Click to enlarge

This subject will be revisited in the near future, where an attempt will be made to more accurately reflect real housing costs over time, taking into consideration changing mortgage rates, real estate taxes, and other factors. One look at the above chart and it is clear that ignoring real housing costs in reported inflation is a disservice to anyone considering the purchase of a home today - a potential home buyer who wonders about the declining real estate purchasing power of the dollar.

So, the original post went up at this blog at the customary time of 6:30 AM PST on Monday, August 17th. Barry Ritholtz over at The Big Picture immediately featured it on his excellent blog, generating a fair amount of lively discussion. Barry so liked the chart that it became his Chart of the Week later in the day.

The article then went up over at Financial Sense Online, generating a steady stream of mail from inquisitive readers, then around dinner time, this post was added to the mix - a chart from the BLS which is really comical, given what has happened with real estate in this country in the last few years.

The next day, amongst a handful of other places, a link showed up at The Blogging of the President where Stirling Newberry first introduces many of us to the term "Friedman-Mundell economy", which then became the focus of a compelling story the following day at Daily KOS entitled Revolt of the Economists.

The architecture of economics that they have built is centered around a simple idea: allow asset inflation, and then keep the people who roll the money over very, very, very happy. The problems of "rational expectations" economics could simply be called "the rich rent the world to the rest of us".

The rise of a new economics is at hand - one which overthrows "rational expectations" and the Friedman-Mundell economy. The first shots of that rebellion have been fired - over inflation and unemployment. And not strangely, the libertarians are selling the ammo.

This is well worth reading in its entirety.

Over the weekend Barry Ritholtz then penned a fine article for TheStreet.com and RealMoney.com, entitled The Unpleasant Truth About Inflation, building on the "inflation reporting as a mis-leading indicator" theme, this time wrapping things up by focusing on the impact that inflation, reported or not, has on corporate profitability and equities. This too is well worth reading in its entirety.

Last but not least we seem to have finally done something here at this blog that has gotten the attention of the rambling, stumbling, and bumbling Mogambo Guru (RSBMG). For liability reasons, we can not recommend reading this in its entirety, however, adventurous souls may find this to be an enjoyable read if accompanied by a stiff drink and a shotgun placed across their lap - for less-adventurous readers, just scroll to the bottom.