Wednesday, April 16, 2008
At some point in time, you'd think that the current trends of falling real estate sales and rising consumer prices would stop and then reverse. Surely that will happen someday, but given how long the opposite was true - rising real estate sales along with falling consumer prices - that may be some time from now.
A short time ago, the Commerce Department reported(.pdf) that, during the month of March, housing starts and permits for new construction plunged to their lowest level in 17 years.
Housing starts fell 11.9 percent for the month and 36.5 percent on a year-over-year basis while permits for new construction, a leading indicator for future homebuilding activity, dropped 5.8 percent from February to March and 40.9 percent from year-ago levels.
The situation continues to get worse for homebuilders - look for even more job losses in this sector in the upcoming labor report in two weeks.
In order to keep their statistics from looking too bad, the Commerce Department should really think about implementing something imaginary to replace real world data like the Bureau of Labor Statistics did some 25 years ago when they replaced the real cost of homeownership with "owners' equivalent rent" in the consumer price index.
As long as owners' equivalent rent and home rental costs account for 30 percent of consumer prices, it is nearly impossible to generate a really big inflation number since both of these costs will likely remain in the two to three percent range as long as there's a housing boom or a housing bust.
As shown in the chart to the right, more than anything else, it was the shelter component that put inflation at almost 14 percent back in the early 1980s (see Stagflation, then and now for more on this subject).
This worked spectacularly when the housing bubble was inflating - more buyers and fewer renters resulted in less demand for rental units and kept rental costs from rising. Now that the housing bubble has burst, a glut of "investment properties" are available for rent - fewer buyers and more renters but much greater supply keep rental costs from rising again.
Think about it Commerce Department ... what follows is the kind of mild report you could be producing if you "worked on the data" a little bit.
The BLS (Bureau of Labor Statistics) reported that, after no change in February, consumer prices rose 0.3 percent in March, up 4.0 percent from year-ago levels.
Energy prices once again rose sharply, heating oil surging 7.9 percent in March and now up 40.2 percent on a year-over-year basis. Gasoline prices rose rose 1.3 percent for the month and 26 percent from last year at this time.
Overall energy costs rose 1.9 percent last month and 17.0 percent from a year ago.
There was good news for fashion bugs as clothing prices fell 1.3 percent in March and are now down 1.4 percent over the past year. The cost of women's and girl's apparel fell 2.6 percent last month and is now down 5.4 percent from year-ago levels.
Food costs continue to rise, however, as the price of bread rose 14.7 percent over the past year and milk prices are up 13.3 percent during that same period.
For those consumers who spend an inordinate amount of their income on clothing and accessories and next to nothing on food and gasoline, it is a veritable dreamworld of lower consumer prices.
For the other 99.5 percent of the population, higher prices hurt.