Wikinvest Wire

For government inflation, home prices were a "non-factor"

Tuesday, May 27, 2008

Below are the long-awaited updates to the charts for OER (owners' equivalent rent) and the S&P Case-Shiller HPI (Home Price Index). First, almost a year after the original chart was created, OER and the HPI side by side.
Note that the original chart now appears in Kevin Phillips' Bad Money, currently #83 at (see Good Sources in "Bad Money"). When this chart first appeared, in last summer's How owners' equivalent rent duped the Fed, the home price decline fit within a lower scale of minus 5 percent with room to spare - now it's at minus 15.3 percent and still moving down.

Of course, owners' equivalent rent has been rock-solid all during the housing boom and bust at between two and four percent - just what you want if your aim is to report only modest "inflation" (the aim of most governments with a fiat money system).

In the chart below, "official" inflation is shown alongside inflation with the HPI substituted for OER. Inflation with home prices included was soaring back when there was little "official" inflation and, today, when everyone is complaining about soaring consumer prices, there's a little dip into negative territory for inflation with home prices instead of OER.
Yes, as noted every time this has been done before, this is an imperfect substitution as OER is intended to reflect the overall costs of owning a home including such things as mortgage interest rates, property taxes, etc.

This exercise is conducted mostly just to demonstrate how ridiculous home ownership costs in the government's inflation statistic looks next to home prices in the real world.

Why is OER such a big deal?

This New York Times graphic shows how big a component OER is in the Bureau of Labor Statistic's inflation calculation. It's there at the bottom - you can't miss it.
That little phrase, "What homeowners would pay if they were renting their homes", is sure to show up in the history books when historians discuss the current era.

To calculate core inflation - the preferred measure of inflation for any Fed economist worth his salt (well, at least up until lately) - the whole pie above is shrunk down to remove both the food and energy components (all the stuff that's going up in price) and OER becomes an even bigger slice of the overall pie.

If the Case Shiller Home Price Index is substituted for owners' equivalent rent in core inflation, then you get outright "DE-flation" today - and not just a little.
These charts go a long way in explaining why things are such a mess these days. For government reported inflation, home prices were a non-factor during the housing boom and bust - they probably shouldn't have been.

There is another handful of charts where the home price index is laid up against all sorts of other economic statistics like employment, consumer spending, Countrywide's stock price, etc. - they should appear here tomorrow.

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ndd said...

Tim, thanks again for the update.

Ever since you first published this series of graphs, I've thought intuitively that you were on to something important. Here's my best shot at an explanation: This is the best graph for capturing the relative strengths of the two biggest factors operating on the American economy, namely the opposing forces of domestic asset price deflation (mainly the housing bust), vs. import price inflation (mainly oil). I've suspected for awhile that the deflationary domestic forces would in time overwhelm the imported inflationary forces, and for the first time your graph is beginning to show that.

Thanks as always.

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