Barron’s jumps on the "We Have Inflation" bandwagon this week, with two editorials acknowledging what Big Picture readers have long known: Inflation, undermeasured by the BLS, is robust and widespread throughout the economy.

Mike Santoli (subbing for Alan Abelson) addresses the subject in the front of the weekly:

"THE COST OF AMERICA’S PASTIMES KEEPS RISING. This is not just a reference to the persistent escalation of prices for Major League Baseball tickets this season, which are up 5.4% on average from 2005, a rate of increase well ahead of that reflected in government-sanctioned inflation data.

The trend in baseball tickets, incidentally, follows a broader pattern in today’s economy. Namely, the things that we need — gasoline, coal, health insurance, tickets for the Red Sox and Yankees — are high and getting more expensive, while things we could easily do without — a third flat-screen TV, another Chevy Tahoe to replace the one GM gave us in ’04, fast-food burgers, box seats to a Royals game — are relatively cheap or dropping in price.

No, other pastimes are feeling the cost squeeze as well. A Nascar race car gets around four to six miles per gallon, about the same as the Class A RVs that so many race fans pilot to follow the circuit around the country all summer. With gasoline prices at retail up 18% from a year earlier and climbing toward the $3-a-gallon level reached last fall, this is becoming an increasingly pricey hobby. Note, not coincidentally, that nationwide registrations of motor homes fell 26% in January from a year earlier.

Perhaps it’s only a matter of time before the rocketing prices of aluminum (up 40% since September to an 18-year high) and titanium (which quadrupled in price last year) make it much more expensive for weekend warriors on baseball fields and golf courses to buy a new weapon to swing.

Arguably the most broadly pursued pastime in the country that’s becoming pricier is borrowing money, specifically borrowing to buy houses. With the bearish turn in the Treasury market driving the 10-year note yield above 5% last week, near a four-year high, Freddie Mac’s benchmark 30-year fixed-mortgage rate rose to just below 6.5%." (emphasis added)

Weighing in from the paper’s end pages: Thomas Donlan (Do We Have Inflation?), who admonishes investors to be "keenly aware of inflation, and of the various methods for calculating it." That means understanding the oddities and permutations that go into the perenial under-measurement of inflation:

"The mathematicians at the federal Bureau of Labor Statistics seemed to confirm the homeowners’ intuition: The index most used to measure the rise of consumer prices (Consumer Price Index for All Urban Consumers) was up 3.4% in 2005, and the price of shelter, whether rented or incorporated in the price of a home, was up 2.6%. The appreciation of homes as investment assets was over 20% in some places. But investment isn’t consumption, and so investment assets aren’t recognized in the CPI. The statisticians confirmed that homeowners were wealthier, but only by definition.

Even within the realm of consumer goods and services, prices often respond to supply and demand more strongly than to the price of money. Gasoline was another hot topic last year. The price was up 50% between September 2004 and September 2005. Since gasoline is a commodity that almost every American buys every week at a price that’s clearly advertised in front of every gas station, many Americans use it as a simple proxy for the cost of living. Such people had the feeling last year that inflation was rising fast."

We’ve discussed all too many times that CPI fails to adequately capture the perniciousness of rising prices as they are experienced by consumer and corporations alike. Donlan observes "Like it or not, we are stuck with measuring inflation by measuring
prices. But we must understand that the measurements are made with a
rubber yardstick."

Ironic. Just as inflation — and the absurdity of the CPI — is finally get the ink it deserves, the acceleration in inflation has begun cooling off.

Oh, we still have
inflation, only its not getting worse at a faster clip anymore.

>

Sources:
Cheapening Luxuries
MICHAEL SANTOLI

Barron’s, April 17, 2006

http://online.barrons.com/article/SB114506023545326674.html

Do We Have Inflation?
THOMAS G. DONLAN
Barron’s, April 17, 2006
http://online.barrons.com/article/SB114505995362126644.html

Category: Data Analysis, Federal Reserve, Inflation

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.

36 Responses to “Do We Have Inflation?”

  1. DBLWYO says:

    I’m not sure that we have to argue mis-measurement rather than being mis-read. Have you looked at the YOY% changes in both CPI and PPI ? Looks pretty inflationary and accelerating too me ! Also note PPI > CPI implies severe profit pressures leading to much lower earnings.

    Date CPI YOY% Trend PPI YOY%
    Jan-03 106.5 2.21% 1.8% 135.3 5.29%
    Feb-03 107.3 2.68% 1.8% 137.6 7.17%
    Mar-03 107.9 2.66% 1.9% 141.2 8.78%
    Apr-03 107.7 1.99% 1.9% 136.8 4.59%
    May-03 107.5 1.80% 1.9% 136.7 4.51%
    Jun-03 107.6 1.89% 2.0% 138 5.42%
    Jul-03 107.7 1.89% 2.0% 137.7 4.95%
    Aug-03 108.2 2.08% 2.0% 138 4.94%
    Sep-03 108.5 2.07% 2.1% 138.5 4.69%
    Oct-03 108.4 1.88% 2.1% 139.3 4.58%
    Nov-03 108 1.60% 2.2% 138.9 4.36%
    Dec-03 107.8 1.70% 2.2% 139.5 4.97%
    Jan-04 108.5 1.88% 2.2% 141.4 4.51%
    Feb-04 109.1 1.68% 2.3% 142.1 3.27%
    Mar-04 109.7 1.67% 2.3% 143.1 1.35%
    Apr-04 110 2.14% 2.4% 144.8 5.85%
    May-04 110.6 2.88% 2.4% 146.8 7.39%
    Jun-04 110.8 2.97% 2.4% 147.2 6.67%
    Jul-04 110.7 2.79% 2.5% 147.4 7.04%
    Aug-04 110.7 2.31% 2.5% 148 7.25%
    Sep-04 111 2.30% 2.5% 147.7 6.64%
    Oct-04 111.6 2.95% 2.6% 150 7.68%
    Nov-04 111.6 3.33% 2.6% 151.4 9.00%
    Dec-04 111.2 3.15% 2.7% 150.2 7.67%
    Jan-05 111.4 2.67% 2.7% 150.9 6.72%
    Feb-05 112 2.66% 2.7% 151.6 6.69%
    Mar-05 112.7 2.73% 2.8% 153.7 7.41%
    Apr-05 113.3 3.00% 2.8% 155 7.04%
    May-05 113.3 2.44% 2.9% 154.3 5.11%
    Jun-05 113.3 2.26% 2.9% 154.3 4.82%
    Jul-05 113.6 2.62% 2.9% 156.3 6.04%
    Aug-05 114 2.98% 3.0% 157.6 6.49%
    Sep-05 115.1 3.69% 3.0% 162.2 9.82%
    Oct-05 115.4 3.41% 3.0% 166.2 10.80%
    Nov-05 114.8 2.87% 3.1% 163.6 8.06%
    Dec-05 114.4 2.88% 3.1% 163 8.52%
    Jan-06 115.2 3.41% 3.2% 164.6 9.08%
    Feb-06 115.4 3.04% 3.2% 161.9 6.79%

  2. D. says:

    What I find interesting is that no one looks at pricing in terms of social status.

    Just a few years ago, people in my entourage bought their cars. Now they lease luxury cars.

    To look as if one is in the same social class as one appreared to be a few years ago, the cost of living has gone up drastically.

  3. me says:

    When my trash collection went from $51 a quarter to $57 by adding a $6 fuel charge, I knew that as usual, the government was lying.

    Gas was $.82 at the end of Clinton’s term and now its $2.82.

    Natural gas. Lipitor, meat. Target sold Sutter & Dodge filet for $8.99 a pound less than a year ago. Now it is $16.99 a pound. Now I eat hamburger.

    My question is, we all know the government is lying so are TIPs a good investment or not?

  4. MAS says:

    Good question “ME”, I’ve been wondering about TIPs myself. Anyone?

  5. royce says:

    “We’ve discussed all too many times that CPI fails to adequately capture the perniciousness of rising prices as they are experienced by consumer and corporations alike.”

    For a long time, you were saying the CPI wasn’t reflecting rising house prices. Now that housing prices are leveling off, or dropping significantly, that aspect of inflation should no longer be a problem.

  6. Robert Cote says:

    “Also note PPI > CPI implies severe profit pressures leading to much lower earnings.”

    Could be (as I suspect) that inflation is eating up all the gains in productivity. It’s those productivity gains that are the only bright spot in the big picture.

    Another reason inflation is reported being lower than is percieved; taxation and government debt. Just because it doesn’t show up in our tax bill, the increase in govt debt is out there in the economy competing for goods and services; gasoline for the military, plywood for Katrina, luxury automobiles for the California Legislature, shredders for the White House…

  7. Andy K says:

    “Now that housing prices are leveling off, or dropping significantly, that aspect of inflation should no longer be a problem.”

    CPI uses housing rent equivalent, not house prices. As mortgage rates move up, rents are going up too. Rents have been stagnant for almost 3 years, now they are starting to move up.

    As housing market slows, CPI may actually go up.

  8. Fred says:

    The market will reprice TIPs based on how much TIPs have missed real inflation.

  9. RW says:

    I’d like to see more comment on assets that be reasonably expected to perform well in inflationary times and specifically on TIPS also.

    When TIPS first came out I thought they could almost be treated as a separate asset class: Bonds to be sure so certainly subject to price decline should yields increase but with semiannual inflation adjusted principal providing some ongoing protection and the assurance the securities could be redeemed when mature at the greater of their inflation-adjusted principal or par amount at original issue; in effect it seemed you were getting an embedded put on the bond.

    The index used is the Average All Items Consumer Price Index for All Urban Consumers (CPI-U) so none of that “Core CPI” or seasonally adjusted business either.

    At least it sounded good in theory but I’m less certain of the reality. I’ve held a position in a TIPS mutual fund for four years, one w/ a low expense ratio and well-recommended management, and initially its performance was quite good – in fact, taken over the whole four years, its total return is quite respectable. However, in the past two years it has returned less (ROI-IRR method) than a short-term Treasury bond fund, significantly less.

    To be sure, unadjusted CPI-U has not been growing at a fast clip but TIPS (or at least the fund that holds them) still seem to be acting much more ‘bond like’ in this rising interest rate environment than I expected. Stated another way, it seems to be the case that shorter TIP duration(s) require a strong correlation between nominal interest rates and inflation; i.e., a weak correlation increases duration and hence increases sensitivity to rates and that’s what we’re seeing now – more lengthy TIP duration.

    I do not understand this well and would like to understand it better.

  10. B says:

    TIPS are an awful investment here. Bonds are potentially entering a long term bear market here. At the minimum, till the Fed starts loosing again bonds will be terrible investments. The Lehman TIPS Bond Fund is off 8% in the last eight months. Corporate bonds are cratering. Ten and thirty year bonds are cratering.

    Inflationary investments? Industrial metals, coal, construction, engineering, oil, grains, precious metals, mining equipment, real estate, health care, etc. When rates were 1% in 2002 was the time to buy. Now, all inflationary asset classes are near or past bubble status. Personally, I think that was yesterday’s investment.

    Now, maybe global markets don’t have inflation under control but I think the smart money is starting to pare back leverage as these asset classes have had higher runs than the equity markets into blow off status in 2000. The central bankers will eventually win that game. By definition, we’ll always have inflation but it won’t be this runaway asset bubble we have now.

  11. donv says:

    I think an interesting question not being addressed here (or anywhere) is the difference between inflation and a drop in the standard of living.

    It seems to me that if prices and wages both go up, that’s inflation. If prices go up and wages stay the same, that’s a drop in the standard of living.

    From what I can see, this looks more like the latter.

  12. Detroit Dan says:

    I think an interesting question not being addressed here (or anywhere) is the difference between inflation and a drop in the standard of living.

    It seems to me that if prices and wages both go up, that’s inflation. If prices go up and wages stay the same, that’s a drop in the standard of living.

    From what I can see, this looks more like the latter. [donv]

    My theory is that standards of living, as measured by consumption, have been held up by greater than normal borrowing. As interest rates head up, borrowing will decline and consumption will go down. Inflation will also eat into ability to consume. So, later this year, consumption will decline, and more people will feel that their standard of living has gone down.

  13. cm says:

    DBLWYO: Thanks for the table. You may have wanted to include it inside two lines:

    <pre>

    </pre>

    so that it appears in fixed font and everything is aligned.

  14. cm says:

    D.: As one car aficionado and serial owner keeps explaining to me, when considering total cost of ownership, rotating leases every few years supposedly gives you much more car at the same monthly cost. He spends a lot of time researching deals, but then probably his yardstick is owning a car only for a few years at best. Whenever a new sporty model comes out, he is getting all itchy.

  15. me says:

    “rotating leases every few years supposedly gives you much more car at the same monthly cost.”

    with no equity.

    That’s like saying renting an apartment is better than owning a house.

  16. GRL says:

    That’s like saying renting an apartment is better than owning a house.

    Which it is, in the short run.

    But one thing that switching from buying to leasing highlights is the ever-escalating cost of automobiles.

  17. D. says:

    cm:

    My husband gives me the same BS.

    It’s like our friend who told us he bought a Cayenne because it will retain its value. In 4 years he’ll still be out at least 40K and that’s not counting the tires at 2000$ each which must be changed every year or so!

    I guess if you were going to change your car every 2-3 years anyway, leasing is economical but the question becomes whether the individual should be replacing his/her car so often?

    Leasing facilitates the flipping while purchasing does a better job of limiting the flipping to those who can better afford it. And when I say afford I mean over a lifespan and not on a monthly cash flow basis.

  18. Larry Nusbaum, Scottsdale says:

    “I do not trust big government, and BIG GOVERNMENT is what we have here. They can and do tilt the statistics to convey to the public what they want us to believe. The Consumer Price Index is a good example of that. The CPI report is supposed to be a barometer of how well the economy is faring. It used to be an indicator of inflation, but it doesn’t truly tell us that anymore. The true definition of inflation is THE EXPANSION OF TH EMONEY SUPPLY and last year alone, the money supply grew by 10.3% and THAT is the real inflation, not the 2.4% as reported by the U.S. Government.”

  19. Damian says:

    “That’s like saying renting an apartment is better than owning a house.”

    In the current environment, renting is, for many people, a much better deal than buying a house – even after the tax benefit is taken into account.

    Also, looking at a car as an investment with equity is very tough given that the damn thing loses value the second it comes off the lot. That’s like buying a stock and having it drop 20-30% after you buy it. Hardly an “investment”….sure – you’ve got equity in the car, but it doesn’t mean that leasing is a bad option.

    Bottom line – leasing may or may not make economic sense depending on your situations. If you were living 10-15m from work and had good parking on each side of the commute, then leasing may make sense.

  20. trader75 says:

    “The true definition of inflation is THE EXPANSION OF THE MONEY SUPPLY”

    Almost but not quite… inflation is actually a product of money supply, monetary velocity, and fluctuations in real output. (Inflation = growth in monetary base + growth in monetary velocity – growth in real output, John Hussman.)

    If you expand the money supply but velocity is falling off a cliff, you can still have a deflationary scenario (pushing on a string). This is basically what Japan went through in their “lost decade,” and what the yield curve may be predicting for us.

    In a happier alternative, if the money supply is expanding at a rate commensurate with expansion in real output, you don’t have to get inflation. Therefore, it’s not always as simple as expanding money supply = inflation.

    Another wacky thing is that you can technically create inflation WITHOUT expanding the money supply dramatically, by decreasing the value of real output and leaving the other inputs constant (assuming they are positive). Thus productivity drag without a commensurate fall in monetary growth or monetary velocity is inflationary, i.e. “throwing money down a rat hole” is inflationary. Wasteful government spending is thus inflationary, Q.E.D. From this perspective, our adventures in real estate and the middle east are inflationary as hell.

    Not disagreeing with you on the original monetary expansion point–which is obviously a factor–just clarifying a bit. A lot of this CPI debate is just talking-head semantics (in terms of those trying to say inflation isn’t a problem).

    One can see that our current situation is highly inflationary simply by examining the raw inputs. It’s not necessary to delve into minutia or debate the value of hedonic adjustments to see what’s happening.

    The “moderate inflation” stance is a clear case of statistic abuse at its worst, a direct attempt to obfuscate logical observation with minutia-fueled tomfoolery.

    I think it was Orwell who commented that “some ideas are so stupid, only intellectuals could believe them.”

  21. trader75 says:

    “That’s like saying renting an apartment is better than owning a house.”

    Heck yeah renting is better than owning–at this juncture anyway.

    It’s not a cut and dried thing, obviously. There are a number of personal considerations. But the idea that it’s always better to own than rent is one of those colossal canards tailor-made to bamboozle the gullible public (kind like ‘stocks for the long run’). It just ain’t that simple.

    A car is not an investment, it’s an expense. The only way to possibly rationalize a vehicle as an ‘investment’ is to buy a highly reliable used vehicle and get 200K miles out of it… and even then, this is just an expense-minimization exercise, not an investment. Anyone who goes to the trouble of rationalizing their purchase of a hot set o’ wheels is probably highly rationalization prone in numerous other aspects of life.

    A house is not far removed from a car in this regard either–if you live in it, it makes more sense to treat your home as a cost center. There was a study done, I forget where, that argued a US homeowner needs average appreciation of 8% a year, over a good length of time, to make money on their ‘investment’ after taking out the costs of property taxes, upkeep, repairs etc.

    If this study has merit, that suggests that any rate of home appreciation below 8% is a money loser, i.e. a lousy investment, when all is said and done. For all the buyers who paid top dollar in the feeding frenzy of the past few years, what are their chances of getting 8% over the long haul? To get 8% per annum on your house, that means the price has to double in less than a decade. How many decades will it take for RE prices to double again from here? More than one I dare say, and probably more than two. Maybe three.

    Investment-shmestment. The reality is, most folks who buy a residential home are probably better off hoping to break even long-term. The payoffs are non-tangible from an investment standpoint: having a place to call your own, having an asset to borrow against, getting locked in to a good neighborhood, having a reason to save.

    And that doesn’t take into account the hassles of home ownership. Unless you know you’ll be in your current geographic location for the next five to ten years, and preferably longer, buying is probably a bad idea. Mobility goes out the window. You’re also on the hook for every repair, minor and major. There is potentially huge opportunity cost, in terms of the money you chunked into your downpayment and / or the income you forego because it’s already been preallotted to mortgage payments.

    Just think of all the poor nitwits out there who not only top-ticked their local real estate market, but increased their external debt load to do so. The mindset that “buying always beats renting” is precisely what has shackled the young couple in their mid-30s with an oppressive mortgage and oppressive student loan / credit-card payments on top.

    For anyone who has a chunk of revolving debt at, say, 10%–which is probably low vis a vis the average–paying off that debt gives a guaranteed return of 10% a year vs not paying it off. But instead, these hoodwinked debtors go and chunk even MORE borrowed money into an inflated asset that may well leave them breakeven or even upside down over the next decade. Treadmill city.

    In comparison, someone who chooses to rent and get debt free gets ahead at least three ways–they maintain flexibility, they have capital available to pay off current debts or find investments with a better reward / risk profile, and they avoid the mistake of paying sucker prices that will make it almost impossible to score the necessary 8% p.a. over the next few decades.

    Last but not least, anyone with cash in hand could have a lot of fun in the next few years… when all the would-be Donald Trumps have gone from capitulation phase to pure disgust phase. When you overhear Starbucks cell phone conversations like “I don’t care anymore, this real estate thing was a total @#$# disaster, just get me the @#$# out,” that’s the time to whip out the checkbook.

  22. me says:

    “If you were living 10-15m from work ”

    Well, in Atlanta the commute is more like 60 miles. If we could ride the subway maybe no car would be the best option. I personally drive an Accord at least 250,000 miles so while I concede renting is good for some situations, home home ownership has to be over 70%.

    The “millionaire next door” does not drive a new car every 2 or 3 years, that’s all I am saying.

    From Clark Howard:

    “It’s harder to compare prices on a lease, and the financing costs built into a lease are very high.

    Leasing may seem cheaper than buying, but you’re mortgaging your future when you lease. After a few years of leasing a vehicle and making payments, you own nothing.

    Manufacturers and dealers like to use upfront fees to create ultra-low monthly payments that mask the actual cost of a lease.

    Most leases allow you to drive an average of 15,000 miles per year. If you exceed the limit, you have to pay a penalty of 8 to 15 cents per mile.

    Before you turn in a leased car, have it detailed inside and out and mke any needed repairs. Then find out what company is officially responsible for determining that the car is in acceptable condition.

    A four- or five-year lease is a recipe for disaster. Many customers end up married to a vehicle they hate or end up paying severe early termination penalties.

    If you lease for five years and your car is totaled in an accident, you could be responsible for a giant gap between the amount the insurance company will pay and the stated residual in the lease.”

  23. trader75 says:

    One other quick note: that 8% hurdle–wish I could find the study–includes borrowing costs and inflation. Only fair when calculating ROI.

  24. Idaho_Spud says:

    Trader75 – I don’t think you can make a blanket statement about home ownership. FWIW I tend to agreee wholeheartedly with most of your other posts.

    True, it would be utter insanity to purchase your first home now, or to have bought your first one in the past couple of years… but a point will come when buying will be sensible again.

    In the long run a home provides a huge safety net: Once the mortgage is paid, it becomes an inexpensive and (relatively) fixed cost shelter for one’s retirement years. When you reach that stage of life, you will be on a fixed income, with conservative investments. The last thing you need is to be dependent on rent prices.

    Having been a renter during the stagflationary 70′s, I can assure you that your landlord won’t fail to raise your rent every six months if *his* cost of living is going through the roof.

    Granted that not everyone remains in the same house their entire life – one can still invest any equity in the next house at the next job. I’ve done this a number of times. In ten more years, my house will be mine, and afterwards I’ll be able to get by with a McJob. Try doing that in a rental – without roomates.

  25. royce says:

    Andy K.-

    “CPI uses housing rent equivalent, not house prices.”

    Sure. But what Barry has been arguing for a long time is that using the HRE has vastly understated the shelter component of the CPI.

  26. RW says:

    Thanks B, I certainly agree that it looks like a real asset blowoff but do not have a clear sense of what the secular trend is; e.g., are the metals and energy giving us fundamental news or is this just ‘typical’ end of cycle. In any case my asset mix has been rather overweight in hard assets since 2000 and I’m trying to get a better handle on available alternatives in what might (or might not) be a period of erosion in real returns. TIPS could be an option but their recent behavior, at least via a fund, appears suspect. It might be better to directly own and ladder them rather than use a mutual fund, which by its very nature can not mature so the duration problem never gets ‘solved;’ I’ll take a look at the behavior of individual issues and investigate that angle a bit more.

    Interesting discussion WRT renting vs. buying. Excluding personal preference (which is probably the largest single determinant in most cases) it pretty much seems to boil down to timing, duration and location: when are you buying, how long do you think you’ll own it, and are you in a place (or situation) where ownership provides leverage. I have an acquaintance who has been a renter all her life and hasn’t moved in the past 20 years but likes her work, managing investments, and travel and dislikes home fixit projects and yard work; renting is a logical choice for her. I don’t move often (although I’ve moved more than her) and personally prefer to own but when I move usually rent first to give me time to gain a better sense of the local market; if I were to move now that rent period might last longer than usual.

    WRT inflation measures, I see at macroblog that Dave Altig thinks the trimmed or median core rate CPI remains an acceptable forecasting tool (http://macroblog.typepad.com/macroblog/2006/04/why_we_focus_on.html) even though the method of constructing CPI remains problematic. It has never been clear to me why a simple moving average of CPI or PPI wouldn’t work just as well if not better but then I’m no economist.

  27. RW says:

    B, forgot to mention I also agree this is a bad environment for bonds (although we may get a short technical bounce next week). Just curious if inflation protected bonds remain too ‘bond like’ to use in this environment or if they could be a viable option (assuming reasonable correlation with inflation). Wish there were more history on TIPS but, as far as I can tell, only one issue has even matured at this point.

  28. trader75 says:

    “In the long run a home provides a huge safety net: Once the mortgage is paid, it becomes an inexpensive and (relatively) fixed cost shelter for one’s retirement years.”

    Never said it’s appropriate to rent for one’s entire life. To make a blanket statement like that is simply to turn the original blanket statement on its head. “Buying always beats renting” is a grossly oversimplified generalization; so is the opposite assertion. Part of the problem is a deep desire to reduce important decisions down to soundbites.

    With that said, the rationale that owning a home is a “safety net” seems odd; any accumulation of invested asets over a few decades’ time can be a safety net. Furthermore, in a truly stagflationary environment there may well be better asset classes to invest in than real estate. If the region where you live is economically depressed, who’s to say the value of your home might not stagnate or decline while other costs are rising. The point is not that a house is a lousy investment; it’s only to say that a house is not always and automatically the best investment.

    In highlighting the advantages of an asset paid for over decades, there is a bit of ‘protect me from myself’ logic being employed; the same type of logic that sees forced saving as a good thing, and encourages overpayment of taxes during the year to get a refund check from Uncle Sam. For a lot of people, this type of logic makes sense, as they really do have to safeguard against their own spendthrift tendencies. But that doesn’t mean it’s the most logical path on the whole.

    Again to clarify, I’m not against home ownership and never said I was.

    My point was that the canard “buying always beats renting” is an oversimplification that has been taken to greatly exaggerated heights–to the temporary benefit of the financial industry–and done a lot of extra damage in recent years.

    Sometimes buying makes sense; sometimes renting makes sense; that’s about as simple as it gets.

  29. cm says:

    me: “That’s like saying renting an apartment is better than owning a house.”

    I couldn’t swear that he never put it like this, but I think that’s pretty much the idea behind “monthly cost”, no?

    Only in his case the point is you can rent a different new house every year instead of selling and buying a different apartment every year, if I got this right.

    I’m pretty sure the arithmetic won’t work out when you buy a car and drive/maintain it reasonable over let’s say 10 years.

  30. cm says:

    trader75: “Investment” does not imply that the return on/benefit from the investment has to be realized by selling the asset. (Perhaps in a “trader’s” terms it does.)

    There are risk control aspects as well, as well as intangible (?) benefits resulting from ownership. Like in the case of a house, the right to remodel or redecorate, or landscape the yard as you see fit.

  31. Idaho_Spud says:

    Thanks cm and trader 75 both.

    I agreee that “buying always beats renting” is utter BS – especially in this credit/housing bubble. I disagree though that owning something free and clear is a case of “protect me from myself”. Quite the reverse actually – when you eliminate one of your greatest monthly expenses (shelter) it allows you a far greater level of financial autonomy.

    Again, I feel this is most important when one is no longer bringing home large paychecks.

    “Investment” is not at all how I would describe my house. “Shelter” is how I would describe my house. In the same vein I describe my car, truck and motorbikes as “transportation”.

    As far as a stagflationary environment and picking better asset classes than real estate, it’s all in the point of view… In a stagflationary environment anywhere you invest is a money loser, but you lose the most in a savings account :)

    But once again, If I’m retired, I don’t care about the value of my house going up (or down). All I care about is keeping my monthly expenses low and consistent, and within my limited fixed budget. Appreciation is not even on the radar screen, capiche?

    As an owner I also avoid having to pay moving expenses when the landlord decides to sell the abode sold out from under me. This is another expense that cannot be eliminated if I rent.

    I’ve rented and I’ve owned, and frankly I prefer to rent. Owning is an enormous pain in the butt. But unless you become independently wealthy, it offers a “low cost senior housing” option when you’re done working for money and your money has to work for you.

    Just a couple of points to ponder for when your whiskers get white like mine :)

  32. me says:

    Hey one way

    “Don’t need no more FARM AIDs for us.”

    No, with the balloned size of agribulture subsidies under this administration you are raping the rest of us with your grubby hand out.

  33. me says:

    “I agreee that “buying always beats renting” is utter BS ”

    So 70% of the people are wrong. Gee I am gald you guys are so smart.

    And for the record, no one said “always” buying.

    Also ther eare a lot of people that do as I do and drive a car 7-10 years.

  34. me says:

    Some of the only savings many people have is theri home. What is the value of a stack of rent receipts?

    Buying a home levels your payment while rent goes up. If you have been lucky enough to have stable rent, what it go up with interest rates soon.

  35. trader75 says:

    “If you have been lucky enough to have stable rent, what it go up with interest rates soon.”

    In a word, no.

    Bubble-based finance tactics aside, the strongest predictors for real estate and rent trends are supply and demand of housing + the state of the local economy.

    In most areas builders are overshooting on the supply side, as they always do in a boom, and over-leveraged RE investors will be feeling the pain right about the same time indebted consumers get gobsmacked.

  36. Idaho_Spud says:

    Easy there, “me” :)

    Nobody said 70% of the people were wrong.

    I said the statement that “buying *always* beats renting” is BS.

    If you bought a McMansion in Phoenix/Sacramento/Sarasota/San Diego last year, with an option-ARM, you’re probably screwed – unlike a renter. In this case, I’d rather have a stack of rent receipts than $100K negative equity :)

    Like short selling, it’s all in the timing. For most people (myself included), buying is preferable for the long haul.