4 ms·

Not the parent, but the answer here comes down to two simple things: 1. Home prices are not captured in CPI, only rents. 2. The headline CPI is a national num

by rory 6y ago

Not the parent, but the answer here comes down to two simple things: 1. Home prices are not captured in CPI, only rents. 2. The headline CPI is a national number. Home price inflation has actually been somewhat tame overall in recent history (2-3% per year), but it has been very geographically uneven. Some places have experienced basically no inflation, while others have tons of it. Here is the graph for home price inflation in the San Francisco region: https://fred.stlouisfed.org/graph/?g=BLdf https://fred.stlouisfed.org/graph/?g=BLdf . You can see that it's often double digits, and certainly much higher than any headline inflation rate.

xyzzyz 6y ago
> Home prices are not captured in CPI, only rents. Yes, because CPI measures cost of buying service of housing. Usually, if housing prices rise, so do rents, pretty much in accord, so monitoring rents already gives you a good view on housing affordability. The extent to which cost of renting is decoupled from house prices is largely explained by changes in interest rates: lower interest rates make mortgages more affordable, which allows more bidding for houses and pushes prices up. However, this on net doesn’t do much to actual affordability of said house: at low rates, the sticker price on a house might be high, but the mortgage payments will still be low. Conversely, in the 70s and 80s, boomers saw many cheap houses on the market, but at mortgage rates of 10-12+%, these were even less affordable than houses are today. That’s why CPI only includes rents, to make an apples-to-apples comparison.
- rory 6y ago
  > Usually, if housing prices rise, so do rents, pretty much in accord While this would theoretically make sense, it's not actually very true in the United States. There's a significant speculative aspect to housing in some markets that results in price increases far higher than rents would sustain (this effect is actually more prominent in other markets, e.g. Canada). Here: https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci... you can see that San Francisco prices are 50x rent, while Plano TX, which also has a high per capita income and low eviction rate, sits at 20x rent.
  - xyzzyz 6y ago
    I think it actually is very true in the United States, outliers like SF notwithstanding. US as a whole is significantly more like Plano than like SF. Sure, that does little to make Bay Area residents feel better about crazy housing prices they deal with, but theirs is by far not a typical American experience.
    - rory 6y ago
      You're right that we should probably ignore San Francisco and a few others to portray the typical American experience. But it's still not obvious why for example Atlanta (22.6x) has almost double the price-to-rent ratio of Milwaukee (12.4x) if not due to speculation. Those both seem like fairly "typical America" cities to me. Would you expect Rent in Atlanta to spike heavily in the coming years? Or is the distinction you're making more about urban vs. suburban? (Since my link is just a mediocre blog, it's not clear if those numbers refer to city or metro area.)
jpmattia 6y ago
> Home prices are not captured in CPI, only rents. This is literally correct, but misses the essential feature of the housing issue in CPI: A large component of the housing contribution is "owner's equivalent rent" (OER). Last I checked (now years ago), there is a survey where BLS essentially polls homeowners with the question "How much would your house rent for?" That number is then used for the OER component of CPI. As the housing bubble was popping, BLS felt it necessary to explain the divergence between rents and OER [1]. The statistic was an absolute mess then, and I haven't seen any reason why it got cleaned up since, although I have not followed it closely in recent years. [1] https://www.bls.gov/osmr/research-papers/2007/pdf/ec070090.pdf https://www.bls.gov/osmr/research-papers/2007/pdf/ec070090.p...

by rory 6y ago

xyzzyz 6y ago

> Home prices are not captured in CPI, only rents. Yes, because CPI measures cost of buying service of housing. Usually, if housing prices rise, so do rents, pretty much in accord, so monitoring rents already gives you a good view on housing affordability. The extent to which cost of renting is decoupled from house prices is largely explained by changes in interest rates: lower interest rates make mortgages more affordable, which allows more bidding for houses and pushes prices up. However, this on net doesn’t do much to actual affordability of said house: at low rates, the sticker price on a house might be high, but the mortgage payments will still be low. Conversely, in the 70s and 80s, boomers saw many cheap houses on the market, but at mortgage rates of 10-12+%, these were even less affordable than houses are today. That’s why CPI only includes rents, to make an apples-to-apples comparison.

rory 6y ago
> Usually, if housing prices rise, so do rents, pretty much in accord While this would theoretically make sense, it's not actually very true in the United States. There's a significant speculative aspect to housing in some markets that results in price increases far higher than rents would sustain (this effect is actually more prominent in other markets, e.g. Canada). Here: https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci... you can see that San Francisco prices are 50x rent, while Plano TX, which also has a high per capita income and low eviction rate, sits at 20x rent.
- xyzzyz 6y ago
  I think it actually is very true in the United States, outliers like SF notwithstanding. US as a whole is significantly more like Plano than like SF. Sure, that does little to make Bay Area residents feel better about crazy housing prices they deal with, but theirs is by far not a typical American experience.
  - rory 6y ago
    You're right that we should probably ignore San Francisco and a few others to portray the typical American experience. But it's still not obvious why for example Atlanta (22.6x) has almost double the price-to-rent ratio of Milwaukee (12.4x) if not due to speculation. Those both seem like fairly "typical America" cities to me. Would you expect Rent in Atlanta to spike heavily in the coming years? Or is the distinction you're making more about urban vs. suburban? (Since my link is just a mediocre blog, it's not clear if those numbers refer to city or metro area.)

jpmattia 6y ago

> Home prices are not captured in CPI, only rents. This is literally correct, but misses the essential feature of the housing issue in CPI: A large component of the housing contribution is "owner's equivalent rent" (OER). Last I checked (now years ago), there is a survey where BLS essentially polls homeowners with the question "How much would your house rent for?" That number is then used for the OER component of CPI. As the housing bubble was popping, BLS felt it necessary to explain the divergence between rents and OER [1]. The statistic was an absolute mess then, and I haven't seen any reason why it got cleaned up since, although I have not followed it closely in recent years. [1] https://www.bls.gov/osmr/research-papers/2007/pdf/ec070090.pdf https://www.bls.gov/osmr/research-papers/2007/pdf/ec070090.p...