Before 1983, CPI measured housing inflation by looking at
what it cost to own a home (house prices, mortgage, property taxes). After 83,
BLS changed the housing component, using the concept of Owner’s Equivalent
Rent. Revert back to the true cost of housing, and Core CPI spikes to a more
realistic 5.3%.

<spacer>
Actual Housing Costs (w/o BLS Adjustments)

Ofheo_chart_tim_i

Source: Tim Iacono

BLS perversely lowers Owner’s Equivalent
Rent
further as utility costs go up: “CPI calculated the pure rent of the
matched renters by removing the value of any landlord-provide utilities.”

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Category: Economy, Inflation, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “Chart of the Week: Actual Housing Costs (w/o BLS Adjustments”

  1. fred c. dobbs says:

    Rookie mistake, BR: You can’t use OFHEO data as “actual housing costs.”
    It is true that home prices are rising faster than equivalent rent. BUT THEY ARE ONLY RISING FOR NEW BUYERS!
    If I bought my home 30 years ago for $30,000 and it’s now worth $3 million, you’d say my housing costs have gone up 10,000%. But I look at my statement and it says I paid off my mortgage this month. and my mortgage payments never budged!! (Don’t ask about my taxes!!) And now I’m sitting on a fortune!!

    BLS adjustments are bad, but BR adjustments are even worse!

  2. Fred,

    You missed the point: Month to month reliance oon renters equivalent dramtically understates actual housing costs and inflation.

    Even worse, the BLS Renters Equivalent is reducing CPI inflation.

    Ever since the Fed lowered prices so much as to make homes affordable for everyone, there is a glut of rentals, and hence their prices have dropped.

    What you paid for a house 30 years ago has no bearing on whether housing prices are appreciating or not, and how strong inflation is.

  3. fred c. dobbs says:

    But what I paid for my house DOES have a bearing on my cost of living. Most people live in houses purchased long ago. The average tenure is 7 years.

    I’m not trying to defend BLS, but I think blindly taking the OFHEO numbers and assuming that housing costs are rising 12% a year is just as foolish as the BLS assuming that rising utility bills = lower rents and ownership costs.

    This issue is one reason why the Fed prefers to use the PCE price index, which treats housing as both a consumption item and an investment item. While housing gets a 20% weighting in the CPI, it’s more like 11% in the PCE index.

    My point: The impact of rising house prices on consumer inflation is much less than you assume.

  4. And my point is that you are wrong, you are looking at the situation from a singuilar rather than a macro economic point of view.

    No one cares what fred c. dobbs (or me for that matter) paid for home; What matters is the cost of homes today to buyers/renters.

    Given the record setting pace of home sales and the big increase in 1st time ownership, plus the disproportionate percentage of GDP that the housing complex accounts for, this matters very very much.

  5. Marshall's Ghost says:

    Fred’s right. The CPI is a measure of average consumer cost of living. If house prices go up 10% in a given year but only 1 out of 10 consumers buy a new home then the average amount spent on new homes went up 1%.

    The CPI does a good job of what its suposed to do. It doesn’t do a good job of measuring what you want it to but that’s not really the CPI’s problem.

  6. erikpupo says:

    Fred,

    To counter your argument though, what about all the underlying home ownership costs that have gone up, such as property taxes and homeowner insurance. Jus t because you paid off your house does not mean your home ownership costs have not gone up. Furthermore, though, to simply say that you paid off your house and thats not inflationary is ridiculous. You exist in an economy, not a vacuum. The price of your home, however appreciated it is, has a direct bearing on the economic well-being of others; someone has to buy your house for you to realize any gain from it.

    The problem with the CPI is that it is attempting to use a measure like rent when 70% of this country owns a home. Thats like saying; lets measure energy not by looking at oil or gas, but measure the rise in solar energy prices.

    Wait, thats probably the next BLS trick.