Dollar’s Purchasing Power Swoons, but CPI ignores house price inflation.
House prices rose by 11.2% from a year ago, the biggest increase since the peak of Housing Bubble 1 in 2006, according to today’s National Case-Shiller Home Price Index for January.
The index is a good measure of “house-price inflation” because it’s based on the “sales pairs” method, comparing the sales price of a house in the current month to the price of the same house when it sold previously, thereby tracking the amount of dollars it takes to buy the same house over time.
But house price inflation is not included in the Bureau of Labor Statistics’ Consumer Price Index. While about one-third of CPI is based on housing costs, it tracks rents exclusively, rather than home prices. Even the CPI for “Owner’s equivalent rent of residence,” which accounts for about 25% of CPI, is based on homeowners’ estimates about how much their house would rent for. This CPI for “Owner’s equivalent rent of residence” ticked up only 2.0% year-over-year (green line), compared to the Case-Shiller Index, which soared 11.2% (red line).
The Case-Shiller Index was set at 100 for January 2000. So the national index value of 236 indicates house prices have surged by 136% since January 2000, including the plunge in the middle, which CPI for homeowners has risen only 72% over the same period. But for many cities prices have surged far more, as we’ll see in a moment.
So you know what’s going on here: the costs of homeownership are surging, but only a portion are included in our inflation measures, turning CPI as an estimate of the loss of the purchasing power of the dollar into a sad joke.
House prices in the Phoenix metro jumped 1.5% for the month and 15.8% year-over-year, making Phoenix the market with the hottest annual house price inflation among the Splendid Housing Bubbles here, ahead of Seattle (14.3%) and San Diego (14.2%)…..