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Sing LA LA LA and Pretend Housing Doesn’t Count – That’s How Conomists Ignore Inflation

In the hall of mirrors where conomists live, there’s no housing inflation. When the prices of consumption goods rise it’s “inflation.” But when housing prices rise, it’s not inflation, it’s “appreciation.” It’s like stock prices. There’s literally no stock price inflation. There’s “multiple expansion,” or “appreciation,” but there’s no “inflation.” That’s how establishment conomists can claim there’s no inflation. They exclude the rising prices of assets.

Mainstream conomic mythology conveniently defines inflation to affect only goods that are consumed, not those held as assets. Establishment conomists simply cover their eyes and ears, and sing “LALALALALALA LA LAAAA, I CAN’T HEAR YOU” as asset prices rise at breakneck speed.

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The BLS uses that theory to eliminate housing inflation from its calculation of CPI. Even though it gives shelter costs a weighting of roughly 40% of CPI, it creates a nonsense number called Owners Equivalent Rent (OER) that uses tenants long term contract rents rather than market rents, so that it rises at about the same rate as recent CPI. Since most residential leases have CPI escalators, it’s a self fulfilling prophecy!

While housing prices and rents have been rising at 4-5% per year, and faster than that in 2012-13, the BLS has lopped off a percent or so from the CPI every month by using OER in its CPI measure instead of actual house prices or market rents. This helps the Federal Government to save billions in benefit and other government payments every year.

Call it what you want, buyers in the housing market are feeling the pressure of housing inflation. The NAR released its monthly data on house prices today. MLS member firms in 160 markets submit this data to the NAR for monthly aggregation and tabulation. It showed an increase of 7.8% in the median US house sale price over the past 12 months. This is for closed sales, which typically occur about 4 to 6 weeks after the date of the contract. Then it takes another month or so for the data to be collected and released. So while it’s not it’s not exactly current data, it is not as slow as the severely lagged and overly smoothed Case Shiller data which represents sales from 5-6 months earlier, when it is released.

Home Sale Prices and Volume- Click to enlarge

Home Sale Prices and Volume- Click to enlarge

Does the NAR data overstate the current rate of price increase? Perhaps. Redfin, a national online real estate brokerage specializing in top US markets, accumulates data from the MLS on current contracts each month from multiple markets. This is the most timely broad based data available. Their data showed a year to year gain of 4.6% in March. Their data is not quite as broad as the NAR’s coverage, and the markets which they cover had been leading the NAR data higher through 2014. The NAR’s data now seems to be catching up to Redfin’s gains. I would give some weight to both numbers and guess that nationally, on average, the US median sale price is trending at roughly 6% per year.

Those numbers don’t reveal the whole story. Redfin’s data is weighted by the number of sales in each market. Of the 50 metros it covers, 16 had double digit percentage gains in March. Another 23 had gains of more than 5% but less than 10%. The majority of sunbelt markets had double digit gains. Weighting each market equally, the year to year gain was 7.8%. All real estate is local. There is no national housing market per se. In the most desirable markets where most people want to leave or move into, double digit increases are common.

Even Redfin’s 4.6% weighted median is still a lot more than the BLS’s bogus OER input into CPI, which it plugged at 2.7%. That had the effect of reducing CPI by at least 0.75% below what it would have been had actual housing prices been used. If trend housing inflation is closer to 6%, then CPI is suppressed by closer to 1.25%.

Meanwhile current conditions are ideal for continued housing inflation. The inventory of existing homes for sale remains near record lows for this time of year at 2 million listings.

Existing Homes Listing Inventory and Sales- Click to enlarge

Existing Homes Listing Inventory and Sales- Click to enlarge

Tight inventory leads to higher prices. As long as interest rates remain near zero, sellers who might otherwise cash out and leave the purchase market have no incentive to do so. That means listing inventory is likely to remain suppressed until competitive cash returns give older homeowners a reason to cash out as they would have in the past when their offspring left the nest. The problem is compounded today by the fact that those children are no longer leaving that nest.

While inventory remains suppressed, the NAR reported a strong increase in houses going under contract in February. The March data on existing home sales (actual closings) supported the February contract data. Closings in March increased by 13.5% over March 2014. It was the strongest March since 2010 when sales were goosed by a tax credit program. To some extent this was snapback from very weak sales in January and February. If inventory remains tight and sale prices continue to ratchet up, sales are likely to weaken again.

As a result of the increase in sales and low inventory, the inventory to contracts ratio for February was at a record low for the month at 4.78. The upward pressure on house prices should continue barring a surge in properties listed for sale

Inventory to Contracts Ratio- Click to enlarge

Inventory to Contracts Ratio- Click to enlarge

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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