Angus at Kids Prefer Cheese is shocked at the disconnect between housing prices and CPI
Chairman Ben’s point of view is that the Fed should do so only to the extent that the bubble bleeds into overall inflation.
Here’s a graph, courtesy of Dr. Housing Bubble (clic the pic for a more glorious image):
The red line shows the growth rate in the Case-Shiller housing price index, the blue line shows the growth rate of housing component of the CPI.
YIKES!!!
From 1998 to 2006, there was a complete disconnect between housing prices (rising like crazy) and the BLS measure of owner equivalent rent (which never went up more that 4% in any of those years).
Hard for a bubble to bleed into inflation when it’s been defined out of the index!
Stock and bond prices aren’t in the CPI. In theory, however, exploding stock and bond prices could lead to increased spending and to inflationary pressures.
We can argue that one should target asset bubbles, but not having housing prices in the CPI is appropriate. If all people cared about was finding a cheap place to live then they could rent. People buying homes in the bubble were making bets on housing prices, interest rates and/or future rents.
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Monday ~ April 25th, 2011 at 7:28 am
q
the obvious question then is “which bubble”? say there is a bubble in one asset class – do you want to slow the entire economy down, which is what you can do with the hammer of monetary policy? (would you do that now if you judged gold to be in a bubble – which to me is far from obvious?)
possibly you could look at a high level metric such as aggregate asset value / gdp – should be something like 45T/15T = 3 or so, and if it deviates much it could show a problem.
Monday ~ April 25th, 2011 at 9:38 am
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Monday ~ April 25th, 2011 at 11:26 am
Scott Sumner
I read his argument differently. Reading between the lines, here’s what I think he meant:
1. The Fed doesn’t care about the “cost of living” per se, they care about the price level because supposedly a stable price level produces macroeconomic stability.
2. The price of new homes is an important part of the overall price of goods and services produced in the US.
3. If the Fed stabilizes a price index, that index should include the price of new homes.
4. It’s fine if we have a cost of living index that excludes the price of new homes, just don’t have the Fed target that index.
I don’t see your argument as being inconsistent with what he wrote.
Monday ~ April 25th, 2011 at 2:23 pm
IVV
Part of the issue as I see it, though, is also that the price of a house is not the price of housing.
If you limit yourself to cash transactions, then yes, house price is directly related to OER. You can also throw in 30 year fixed mortgages (or most fixed-payment mortgages) and get a close relationship between house price and OER.
But that’s not what happened.
If you get a negative amortization (I call it neg-am) loan and sell the home once the neg-am period dries up, then you can maintain a fixed, low OER (to the point that it drives actual rent in the local market), while home prices skyrocket. Thus, the price for owning a house isn’t $200K, then $300K, then $500K; it’s $800/mo over the entire period (maybe up to $1,000/mo at the very end). It’s only once you can’t be sure to sell the home for a profit that you won’t be able to get the neg-am anymore, and suddenly you’re paying $2,000/mo on the house, even though its price has dropped back towards the $200K.
Tuesday ~ April 26th, 2011 at 7:52 am
The CPI and houses « Modeled Behavior
[...] | Tags: CPI, house prices, OER | by Adam Ozimek Semi-retired blogger Scott Sumner commented on Karl’s post about how the CPI calcuates inflation of owner-occupied housing. So long as he keeps commenting [...]
Thursday ~ May 5th, 2011 at 1:17 pm
Mccade
I’m not easily impressed. . . but that’s imprsiesng me!