On May 28, the S&P/Case-Shiller Home Price Index was released. I realize that I’m a little late to the party, but I think it’s important that I comment. More importantly, I think it’s important that you see these numbers from a different viewpoint.
If you want to read the official (6-page) press release, you can read it here. If you’re scrolling through emails while sitting on the toilet and you have to be out the door in a few minutes, then I’ll give you the short version.
The leading measure of U.S. home prices showed that the national average rose 1.2% over the 1st quarter of this year. More impressive (or concerning?) is the 10.2% increase we have experienced, as a nation, over the last 12 months. A composite of 20 major metropolitan areas showed an increase of 10.9% over the last 12 months. This ranged from Phoenix which saw an increase of 22.5%, Los Angeles at 16.6%, to Charlotte (my home) at 7.3%. Regardless of which city you look at, the trend is certainly shooting upward.
What does this mean?
If you are an average American that occasionally watches the news, you view this as a rebound in the housing industry and as a positive economic indicator. But, if you are a critical financial blogger that thinks things are far worse than is being reported, you view this differently.
Here are a few of my thoughts regarding the recent S&P/Case-Shiller Home Price Index:
1. There is a Serious Disconnect Between CPI and Inflation
The title I used for this article was the exact headline I read from a recent finance article. I COULD NOT STOP LAUGHING at the oxymoron.
How can the price of houses rise 10.9% at a time that inflation is non-existent? The fact that home prices have risen 10.9% proves that THERE IS INFLATION. This is what you call a paradox. Unless, of course, you use the government-provided Consumer Price Index (CPI) to measure inflation.
The CPI is Used to Understate Inflation
In 1983, the Reagan administration decided to change the way that the CPI was calculated. The cost of buying a home was actually replaced by the cost of renting a home. Since 67% of Americans own the home they live in, it only makes sense NOT to include this, right? They thought it would give a more accurate depiction of costs by focusing on 1/3rd of the population rather than the other 2/3rd’s (that was previously being used).
Next, my personal favorite, is the “basket of goods” that the government uses to calculate the CPI. To simplify the calculation, the government will look at Oranges, Apples and Bananas. If I wanted to measure the rise (or fall) in prices of these 3 goods, I would simply look at the difference in price and report, “Orange prices rose 1%, Apple prices rose .5% and Banana prices dropped .3%.” This simple solution is way too elementary for the wise-guys in Washington. They think: “Since Orange prices rose 1%, people probably won’t want to eat Oranges anymore. Thus, we will apply a smaller weight to Oranges. Apple prices rose a tad, so we’ll assume some people still eat Apples, but not as many as before. Since Banana prices actually dropped, I bet everyone eats Bananas so we’ll apply the largest weight to Bananas.” A higher weight is applied to goods that have fallen in price and a smaller weight is applied to goods that have risen in price. Better yet, if the price of one good rises too much, they’ll entirely remove it from the “basket” and replace it with a more stable-priced good. This, obviously, understates the true change in price.
Not surprisingly, a lot of government economists believe that the CPI actually OVERSTATES inflation. LOLOLOLOLOLOLOLOLOLOL!
2. We are Re-inflating the Housing Bubble
The reason the government revised the inclusion of home prices in the CPI is because housing is seen as a hybrid between consumption and investment. But, contrary to what every personal finance blogger tells you: buying a house is consumption, not investment. If you buy food, you consume the food. If you buy a car, you consume the car. If you buy a house, you consume the house.
***If home prices were included in inflation statistics, the Federal Reserve would’ve likely raised interest rates in the 2000’s rather than lowering them. I can’t guarantee that this would’ve prevented the financial crisis, but it certainly would’ve slowed down the excessive borrowing.***
The only reason we have seen such a boom in housing, creating this “investment” opportunity, is because the government has subsidized the entire industry. Over several Presidencies (Republicans & Democrats), there has been an increasing belief that everyone should buy a home.
People laugh at me when I tell them that we’re re-inflating the housing bubble. But, we continue to make the same mistakes that led to the housing bubble in the first place.
***The term “bubble” has been overused in the media. When I use the term “bubble,” I am referring to a misallocation of resources. I will expand on this in a later article.***
Readers: What do you think? Do you think that housing should be included in inflation statistics? Do you think that the “rebound” in housing is a positive thing?