Global| Mar 10 2021Fact vs. Fiction: Understatement of Housing Inflation Exceeds "Bubble" Levels
|in:Viewpoints
Summary
The understatement of housing inflation in the consumer price index has reached a new milestone. As reported, the gap between the actual change in house prices and owners' rent, as published by the Bureau of Labor Statistics (BLS), [...]
The understatement of housing inflation in the consumer price index has reached a new milestone. As reported, the gap between the actual change in house prices and owners' rent, as published by the Bureau of Labor Statistics (BLS), exceeds the "bubble" levels.
In February, BLS reported owner's rent increased 2% over the last 12 months. House price inflation, as reported by the Federal Housing Finance Agency (FHFA), increased 11.4%. That gap over 900 basis points exceeds the 800 basis point gap recorded during the housing bubble peak.
The consumer price index was created and designed to measure prices paid for purchases of specific goods and services by consumers. The CPI was often referred to as a buyers' index since it only measured prices "paid" by consumers.
The CPI has lost that designation. It is no longer measures actual prices. For the past two decades, BLS imputes the owners' rent series, using data from the rental market, no longer using price data from the larger single-family market.
Imputing prices for the cost of housing services make the CPI a hybrid index or a cross between a price index and a cost of living index. A hybrid index is not appropriate as a gauge to ascertain price stability, especially when the hypothetical measure of owner's rent accounts for 30% of the core CPI.
The CPI missed the price "bubble" of the mid-2000s, and the economic and financial fallout was historic. History sometimes repeats itself in economics and finance. Policymakers forewarned.
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.