Case-Shiller home price data via St. Louis Fed, chart by Mish

Home Prices Disconnect From Rent and OER

Case-Shiller home price data and CPI data via St. Louis Fed, chart by Mish

Home Price Disconnect Notes

• National is the Case-Shiller national home price index.
• 10-City represents the weighted average of the cities in the first chart.
• CPI is the Consumer Price Index
• OER stands for Owner's Equivalent Rent. It is the single largest component in the CPI with a current weight of 24.151% of the total CPI.
• Rent of Primary Residence is a CPI component with a weight of 7.374% of the CPI.

OER is the mythical price the Bureau of Labor Statistics (BLS) says one would pay to rent one's own house from oneself, unfurnished, without utilities.

CS National, Top 10 Metro Percent Change From Year Ago

Percent Change From Year Ago Notes (January 2022)

• CPI: 7.48%
• OER: 4.09%
• Rent: 3.76%
• Case-Shiller 10-City: 17.52%
• Case-Shiller National: 19.17%

CPI Understated?

Yes, by a lot.

I do not believe OER is only up 4.09%. Nor do I believe rent is only up 3.76%.

Moreover, home prices are not directly in the CPI, only OER and and Rent.

CPI vs Case-Shiller Adjusted CPI

CPI data from the BLS, the adjusted CPI is a Mish calculation

Adjusted CPI Discussion

My Case-Shiller adjusted CPI is calculated by substituting the percentage change in the Case-Shiller national index for OER in the CPI.

The result is an adjusted annual CPI rise of 10.29%. That's a new record high for this data series.

There is a lot of controversy over this procedure. The BLS and many economists will point out that houses are not a "consumer" expense but a "capital" expense.

That's technically accurate except historically home prices used to be in the CPI so historical comparisons are a bit distorted.

The problem with being "technically" accurate is that it is a huge mistake by the Fed to ignore asset bubbles. Inflation matters, not just alleged CPI inflation.

This historical distortion never mattered much in practice because the second chart shows OER, the CPI, rent, and home prices all rose in sync.

Real Interest Rates

CPI data from the BLS, the adjusted CPI is a Mish calculation

Real Interest Rates Discussion

One can calculate "real" (inflation-adjusted) interest rates by subtracting the rate the Fed charges from CPI measures.

The Fed charges 0.8%, mortgage rates had been around 2% in January but have since soared so one could formulate another version of "real" based on mortgages.

No matter how you slice it, rates are amazingly low. With home prices up 19% but the Fed Funds Rate at 0.08% in January and mortgages now only 4% or so, it's no wonder we have another housing bubble and bubbles in equities.

The Fed wanted higher inflation and finally got it in spades.

Why the Inflation Surge?

1. Three rounds of fiscal stimulus, two by Biden and one by Trump
2. Supply chain disruptions
3. Massive change in consumer preferences from services to goods
4. QE finally mattered
5. War - Not reflected in these charts as home price data only through January

1: Fiscal Stimulus

There were three rounds of fiscal stimulus, the last two of which were unwarranted in size and scope.

In addition to direct fiscal stimulus, Trump initiated and Biden twice extended evictions. Many people made no attempt to pay rent and instead spent that money

2: Supply Chain Disruptions

Supply chain disruptions erupted due to Covid-19.

3: Massive change in consumer preferences from services to goods

As a result of Covid consumers stopped eating out, going to the gym, going to movies, reduced haircuts etc. Instead they needed home offices, new computers, etc.

QE Finally Matters

Thanks to the Fed's QE policy, the stock market made an enormous bubbles.

The bubble wealth effect led people chasing homes regardless of price. And a huge wave of boomer retirements from those feeling wealthy increased the labor shortage.

Poor Measure of Inflation

The big problem the Fed failed to see is that the CPI is an extremely poor measure of inflation.

I assure you inflation matters, not just alleged consumer inflation.

The Fed missed a huge jump in inflation because it does not know what to look at.

President Biden Says "I Feel Your Pain"

President Biden Says "I Feel Your Pain", He Means His Pain in Polls

‘I know food prices are up, and we’re working to bring them down,’ says President Biden.

Biden and Inflation Go Hand in Hand

Lumber futures courtesy of the Nasdaq, annotations by Mish.

Unfortunately, everything Biden stands for is inflationary: Free education, free child care, free paid leave, etc.

The president also has a big push for unions, and that's guaranteed to raise the price of everything the unions touch.

Finally, president Biden increased tariffs on Canadian lumber helping fuel home price inflation.

CPI Up Most in 40 Years

For more on the CPI, please see Consumer Price Index Jumps to 7.9 Percent, Another New Four-Decades High.

That CPI report is as of February. Home price data lags. 

Alleged "Benefits of Running the Economy Hot"

Finally, recall that Charles Evans, president and chief executive officer of the Chicago Fed wants to run the economy hot.

For discussion, please see Chicago Fed President Praises the "Benefits of Running the Economy Hot"