The Most Splendid Housing Bubbles in America: “House-Price Inflation” in all its Glory

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Wolf Street: ouse prices rose by 11.2% from a year ago, the biggest increase since the peak of Housing Bubble 1 in 2006, according to today’s National Case-Shiller Home Price Index for January.

“You have sown much, and bring in little;
You eat, but do not have enough;
You drink, but you are not filled with drink;
You clothe yourselves, but no one is warm;
And he who earns wages,
Earns wages to put into a bag with holes.” Haggai 1:6

The index is a good measure of “house-price inflation” because it’s based on the “sales pairs” method, comparing the sales price of a house in the current month to the price of the same house when it sold previously, thereby tracking the amount of dollars it takes to buy the same house over time.

But house price inflation is not included in the Bureau of Labor Statistics’ Consumer Price Index. While about one-third of CPI is based on housing costs, it tracks rents exclusively, rather than home prices. Even the CPI for “Owner’s equivalent rent of residence,” which accounts for about 25% of CPI, is based on homeowners’ estimates about how much their house would rent for. This CPI for “Owner’s equivalent rent of residence” ticked up only 2.0% year-over-year (green line), compared to the Case-Shiller Index, which soared 11.2% (red line).

So you know what’s going on here: the costs of homeownership are surging, but only a portion are included in our inflation measures, turning CPI as an estimate of the loss of the purchasing power of the dollar into a sad joke. Read More

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