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Home Prices Hit New Record High, Don’t Worry, It’s Not Inflation

May 5, 2024

Home Prices Hit New Record High, Don’t Worry, It’s Not Inflation

The Case-Shiller national home price index hit a new high in February. That’s the latest data. Economists don’t count this as inflation.

Case-Shiller national and 10-city indexes via St. Louis Fed, OER, CPI, and Rent from the BLS

Chart Notes

  • National and 10-City Case-Shiller home prices hit new record highs in February
  • OER, CPI, and Rent are indexes measured by the Bureau of Labor Statistics (BLS).
  • OER stands for Owners’ Equivalent Rent. It’s the price one would pay to rent one’s own house unfurnished and without utilities.

Case-Shiller measures repeat sales of the same home over time and the indexes attempt to weed out major home improvements.

Case-Shiller is a far better measure of home prices than median or average prices which do not factor in the number of rooms, location, lot size, or amenities.

Not Inflation?!

Economists, including the Fed, consider homes a capital expense, not a consumer expense.

As a result, they all ignore economic bubbles and blatantly obvious inflation on grounds it’s not consumer inflation. This has gotten the Fed into trouble at least three times. The first was the dot-com bubble, then the Great Recession housing bubble and now.

It’s really pathetic when you make the same major mistake over and over and over. It’s a result of group think.

They all believe in the same silly models based on disproved theories including inflation expectations and the Phillips curve. You do not get in the good ole boys Fed club unless you think like a good ole boy.

Inflation Expectations

Fed Chair Jerome Powell mentions inflation expectations at every meeting. So did former Chairs Janet Yellen and Ben Bernanke.

In my post How Do Inflation Expectations Impact Wages and Future Consumer Inflation? I explain why inflation expectations are irrelevant to future inflation.

Moreover, two Fed studies agree.

…click on the above link to read the rest of the article…

What Will You Do When Inflation Forces U.S. Households To Spend 40 Percent Of Their Incomes On Food?

May 10, 2021

What Will You Do When Inflation Forces U.S. Households To Spend 40 Percent Of Their Incomes On Food?

Did you know that the price of corn has risen 142 percent in the last 12 months?  Of course corn is used in hundreds of different products we buy at the grocery store, and so everyone is going to feel the pain of this price increase.  But it isn’t just the price of corn that is going crazy.  We are seeing food prices shoot up dramatically all across the industry, and experts are warning that this is just the very beginning.  So if you think that food prices are bad now, just wait, because they are going to get a whole lot worse.

Typically, Americans spend approximately 10 percent of their disposable personal incomes on food.  The following comes directly from the USDA website…

In 2019, Americans spent an average of 9.5 percent of their disposable personal incomes on food—divided between food at home (4.9 percent) and food away from home (4.6 percent). Between 1960 and 1998, the average share of disposable personal income spent on total food by Americans, on average, fell from 17.0 to 10.1 percent, driven by a declining share of income spent on food at home.

Needless to say, the poorest Americans spend more of their incomes on food than the richest Americans.

According to the USDA, the poorest households spent an average of 36 percent of their disposable personal incomes on food in 2019…

As their incomes rise, households spend more money on food, but it represents a smaller overall budget share. In 2019, households in the lowest income quintile spent an average of $4,400 on food (representing 36.0 percent of income), while households in the highest income quintile spent an average of $13,987 on food (representing 8.0 percent of income).

…click on the above link to read the rest of the article…

Toronto Home Prices Just Plunged At A Rate Not Seen Since 1996

December 18, 2018

Toronto Home Prices Just Plunged At A Rate Not Seen Since 1996

A seismic shift is currently underway in the Toronto real estate market which may have finally pricked Canada’s biggest bubble. In October, home prices plunged at the fastest pace in more than two decades, according to new data published by Statistics Canada.

Statistics Canada’s Price Index for new Toronto homes declined 1.4% in October from a year earlier, the most since September 1996. Across all provinces and territories, home prices increased 0.1%, the slowest pace since 2010, which signals the country’s real estate market has stalled and could reverse into 2020.

The pace of new home construction crashed by a massive 40.3% in the Greater Toronto Area between October 2017 and October 2018.

Bloomberg describes the turning point in the real estate market as a result of government measures, introduced in 2017 to help cool the city’s red-hot housing market, such as tighter mortgage lending laws.

“The Bank of Canada also raised its trend-setting interest rate five times between July 2017 and October of this year,” notes Bloomberg.

“New home prices were advancing at an annual pace of almost 4% late last year before the mortgage rules took effect.”

Further, the current economic backdrop suggests storm clouds are gathering across the country. Last week, the Canadian 2 and five year bond yields inverted, for the first time since 2007.

“This is often taken as a signal that investors are more optimistic about short-term prospects versus the long term, suggesting a lack of confidence in continued economic growth. This can also impact bank profitability, as banks pay short-term rates on deposits and take in long-term rates on loans. A flat or inverted yield curve, therefore, could lead to negative net interest margins,” said Steve Saretsky of VancityCondoGuide.

As Saretsky shows, this can cause bank lending to further tighten, leaving borrowers high and dry when market liquidity is most needed.

…click on the above link to read the rest of the article…

“Severe Collapse” of Home Prices Might Trigger a “Financial-Institution Crisis” in Australia: OECD Frets about the Bank

December 12, 2018

“Severe Collapse” of Home Prices Might Trigger a “Financial-Institution Crisis” in Australia: OECD Frets about the Bank

“The authorities should prepare contingency plans.” The big four banks are too exposed to mortgages. Even if the banks don’t topple, the economy will get hit hard.

In its latest report on Australia, the OECD focuses to a disturbing extend on housing, household debt, what the current housing downturn might do to the otherwise healthy economy, and what the risks are that this housing downturn will lead to a financial crisis for the big four Australian banks, an eventuality that it says “authorities” should make “contingency plans” for.

The big four banks are huge in relation to the Australian stock market and the overall economy: Their combined market capitalization, at A$341 billion, even after today’s sell-off following the OECD report – accounts for 26% of Australia’s total stock market capitalization.

How they dominate the stock market showed up on Monday after the release of the report:

  • Common Wealth Bank of Australia (CBA): -2.98%
  • Westpac (WBC): -3.38%
  • Australia and New Zealand Banking Group (ANZ): -4.09%
  • National Australia Bank (NAB): -2.54%

The overall ASX stock index on Monday dropped 2.27%.

These big four are heavily owned by Australian pension funds, retail investors, and the like and form a big part of the retirement nest egg of the nation. So a banking crisis that involves the Big Four matters on all fronts – and the OECD report even pointed out that a collapse in the share prices of the Big Four would itself impact the overall economy negatively.

The report (PDF) starts by explaining just how strong the economy is in Australia:

With 27 years of positive economic growth, Australia has demonstrated a remarkable capacity to sustain steady increases in material living standards and absorb economic shocks.

…click on the above link to read the rest of the article…

Think You’re Prepared For The Next Crisis? Think Again.

October 6, 2018

BLOG

Think You’re Prepared For The Next Crisis? Think Again.

Even the best-laid preparations have failure points

No plan of operations extends with any certainty beyond the first contact with the main hostile force.

~ Helmuth von Moltke the Elder

Everybody has a plan until they get punched in the mouth.

~ Mike Tyson

Scottish poet Robert Burns aptly penned the famous phrase: “The best laid schemes o’ mice an’ men/Gang aft a-gley.” (commonly adapted as “The best laid plans of mice and men often go awry.”)

How right he was.

History has shown time and time again that the only 100% predictable outcome to any given strategy is that, when implemented, things will not go 100% according to plan.

The Titanic’s maiden voyage. Napolean’s invasion of Russia. The Soviet’s 1980 Olympic hockey dream team. The list of unexpected outcomes is legion.

Dwight D. Eisenhower, the Supreme Commander of the Allied Expeditionary Forces in Europe during WW2, went as far as to say: “In preparing for battle, I’ve always found that plans are useless but planning is indispensable.”

This wisdom very much applies to anyone seeking safety from disaster. Whether preparing for a natural calamity, a financial market crash, an unexpected job loss, or the “long emergency” of resource depletion — you need to take prudent planful steps now, in advance of crisis; BUT you also need to be mentally prepared for some elements of your preparation to unexpectedly fail when you need them most.

Here are two recent events that drive that point home.

Lessons From Hurricane Florence

A family member of mine lives in Wilmington, NC, which received a direct hit last month from Hurricane Florence.

…click on the above link to read the rest of the article…

Housing Collapse Coming Right Up

March 8, 2018

Mortgage rates are high and rising. Refinancing opportunities are nonexistent; home affordability has collapsed.

The latest Black Knight Mortgage Monitor is worth a very close look.

Here’s what the report says about the feature chart.

  1. Recent rate jumps coupled with climbing home prices have increased the cost to purchase the median home by $67/month (+6 percent) over the past six weeks.
  2. Overall, it costs $1,141 in monthly principal and interest to purchase the median home using a 30-year fixed mortgage with 20 percent down, the largest monthly payment required since late 2008.
  3. It currently takes 23 percent of the median income to purchase the median home, the highest share since 2009.
  4. However, overall affordability remains better than long-term historical averages, even taking the recent rate jump into consideration. Purchasing the median home requires one percent less of the median income than 1995-1999, three percent less than 2000-2003 (before the sharp run-up in home prices) and two percent below those combined benchmarks (1995- 2003).
  5. Average incomes are more than 20 percent higher today than in 2006 (according to the Census Bureau) and interest rates 2.3 percent lower. As such, affordability remains much better than at the pre-recession peak, even though today’s home prices have surpassed 2006 levels.
  6. Assuming all else remains equal, to return to 2006 affordability levels, interest rates would have to climb north of 8.0 percent or the median home price increase to $420K.

Statistical Nonsense

Black Knight is correct on points 1-3. Statistically, it is correct on points 3-6. However …

Regarding point 5: It’s not average incomes that matter, it’s median incomes.

Regarding points 4 and 6: Those who want a home and can afford a home have a home. The rest struggle because incomes have not kept up with home prices.

Notions of affordability are statistical nonsense. Black Knight does mention some of these issues in relation to other charts.

…click on the above link to read the rest of the article…

It’s Looking A Lot Like 2008 Now…

February 3, 2018

It’s Looking A Lot Like 2008 Now…

Did today’s market plunge mark the start of the next crash?

Economic and market conditions are eerily like they were in late 2007/early 2008.

Remember back then? Everything was going great.

Home prices were soaring. Jobs were plentiful.

The great cultural marketing machine was busy proclaiming that a new era of permanent prosperity had dawned, thanks to the steady leadership of Alan Greenspan and later Ben Bernanke.

And only a small cadre of cranks, like me, was singing a different tune; warning instead that a painful reckoning in our financial system was approaching fast.

It’s fitting that I’m writing this on Groundhog Day, as to these veteran eyes, it sure has been looking a lot like late 2007/early 2008 lately…

The Fed’s ‘Reign Of Error’

Of course, the Great Financial Crisis arrived in late 2008, proving that the public’s faith in central bankers had been badly misplaced.

In reality, all Ben Bernanke did was to drop interest rates to 1%. This provided an unprecedented incentive for investors and institutions to borrow, igniting a massive housing bubble as well as outsized equity and bond gains.

It’s worth taking a moment to understand the mechanism the Federal Reserve used back then to lower interest rates (it’s different today). It did so by flooding the banking system with enough “liquidity” (i.e. electronically printed digital currency units) until all the banks felt comfortable lending or borrowing from each other at an average rate of 1%.

The knock-on effect of flooding the US banking system (and, really, the entire world) in this way created an echo bubble to replace the one created earlier during Alan Greenspan’s tenure (known as the Dot-Com Bubble, though ‘Sweep Account’ Bubble is more accurate in my opinion):

…click on the above link to read the rest of the article…

Volatility in Housing: What Surges & Crashes the Most?

August 11, 2017

Volatility in Housing: What Surges & Crashes the Most?

It depends on the value of the home.

What happens to home prices during the current housing boom and the next housing bust depends to some degree on whether the home is relatively “affordable” — whatever that means at today’s prices — or more expensive.

This is an important data point in the consideration for lenders that have to worry about their collateral value and for residential property investors and for homeowners who might want to get a foretaste of what is next.

The CoreLogic Case-Shiller Home Price Index offers an index based on three tiers of prices — low tier, middle tier, and high tier. Like small-cap stocks versus large-cap stocks, the less expensive homes show much more price movements up anddown and are thus far more volatile during booms and busts than their more expensive counterparts.

The Tiered Home Price Index (TPI) comprises 16 metro areas: Boston, New York City, Washington DC, Chicago, Denver, Las Vegas, Los Angeles, San Diego, San Francisco (five-county Bay Area), Miami, Atlanta, Minneapolis, Phoenix, Portland, Seattle, and Tampa.

Prices in the low tier rose 10.8% year-over-year, according to the TPI, published in August. For mid-tier homes, the index rose 7.5%. And for expensive homes prices rose 4.8%.

That principle has been true for the past 17 years of the index, covering two housing booms and one housing bust so far. The chart below shows how prices of homes in the low tier (yellow line) rise much faster than higher priced homes, but during the bust, they also plunge much faster and bottom out a lot lower (chart via  John Burns Real Estate Consulting):

…click on the above link to read the rest of the article…

A Murderous Complacency

February 4, 2017

A Murderous Complacency

Dark omens are circling everywhere in today’s markets

murder: a flock of crows

~ Miriam-Webster dictionary

Many view the appearance of crows as an omen of death because ravens and crows are scavengers and are generally associated with dead bodies, battlefields, and cemeteries, and they’re thought to circle in large numbers above sites where animals or people are expected to soon die.

~ “Nature”, PBS.org

Running PeakProsperity.com requires me to read and process a lot of data on a daily basis. As it’s hard to digest it all in real-time, I keep a running list of charts, tables and articles that catch my attention, to return to when I have the time to give them my full focus.

Lately, that list has been getting quite long. And it’s largely full of indicators that concern me; signals that the long era of “extend and pretend” in today’s markets may finally be at its terminus.

Like crows circling overhead, every day brings with it new worrisome statistics that portend an ill change ahead. Indeed, these omens are increasing so quickly now that it’s hard not to feel like Tippi Hedren in Hitchcock’s suspense classic The Birds:

So what are the data that make me think these crows will soon be feasting on the carcass of the great bull market that has powered stock, bonds, real estate and most other asset classes to record highs since 2009?

Rogue’s Gallery

Complacent Investors

Investors have enjoyed remarkably gentle treatment by the stock markets over the past half-decade. Retracements have occurred much less frequently than historical norms, and have been shallow and short-lived when they happened.

Tom Lee, head of research at Fundstrat and often referred to as “Wall Street’s biggest bull” notes that 2016 was the mildest year on record for the S&P 500, with only 7 days in which the index traded at less than 3% of its 52-week high.

…click on the above link to read the rest of the article…

 

Something Smells Fishy

May 30, 2015

SOMETHING SMELLS FISHY

It’s always interesting to see a long term chart that reflects your real life experiences. I bought my first home in 1990. It was a small townhouse and I paid $100k, put 10% down, and obtained a 9.875% mortgage. I was thrilled to get under 10%. Those were different times, when you bought a home as a place to live. We had our first kid in 1993 and started looking for a single family home. We stopped because our townhouse had declined in value to $85k, so I couldn’t afford to sell. In 1995 I convinced my employer to rent my townhouse, as they were already renting multiple townhouses for all the foreigners doing short term assignments in the U.S. We bought a single family home in 1995 with the sole purpose of having a decent place to raise a family that was within 20 minutes of my job.

Considering home prices on an inflation adjusted basis were lower than they were in 1980, I was certainly not looking at it as some sort of investment vehicle. But, as you can see from the chart, nationally prices soared by about 55% between 1995 and 2005. My home supposedly doubled in value over 10 years. I was ecstatic when I was eventually able to sell my townhouse in 2004 for $134k. I felt so smart, until I saw a notice in the paper one year later showing my old townhouse had been sold again for $176k. Who knew there were so many greater fools.

This was utterly ridiculous, as home prices over the last 100 years have gone up at the rate of inflation. Robert Shiller and a few other rational thinking people called it a bubble. They were scorned and ridiculed by the whores at the NAR and the bimbo cheerleaders on CNBC. Something smelled rotten in the state of housing.

…click on the above link to read the rest of the article…

 

 

 

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