6 ms·

Here's the problem - we use the Consumer Price Index to measure inflation, of which "housing" is only 33% - much of which is actually rent, which is quite a bit

Here's the problem - we use the Consumer Price Index to measure inflation, of which "housing" is only 33% - much of which is actually rent, which is quite a bit more inelastic than home prices. If someone buys an 8 unit condo building in 1980 and rents out each unit for a 20% profit, 20 years later they're still making a 20% annualized profit and maybe rent hasn't increased. Asset inflation is inflation. That "real" inflation, also known as the consumer price index, hasn't been going up is a factor of both automation/economies of scale and an extremely bifurcated economy in which low end workers are making pennies, toilet paper is cheap, but a house in an area with a working economy costs triple what it did 10 years ago. Here's the case shiller national home pricing index: https://fred.stlouisfed.org/series/CSUSHPINSA https://fred.stlouisfed.org/series/CSUSHPINSA Compare that to any inflation chart. Its not supposed to be the same, but I posit the "housing" part of the CSI is almost completely inelastic and only reflects what people pay in rent/mortgage, not the cost of entry. Housing prices can go up by 20% a year for 5 years and there's still no "inflation".

ethdkreuoreuc 5y ago
Rent is up more than 9% this year alone. Inflation is now large enough to show up in the CPI in a significant way.
lostlogin 5y ago
> 20 years later they're still making a 20% annualized profit and maybe rent hasn't increased. You live in a very different region to me. I just checked and it’s hovering at about 3%, and this is causing a lot of problems.
nszceta 5y ago
Please read this article in its entirety to understand how we go to where we are today. http://www.shadowstats.com/article/no-438-public-comment-on-inflation-measurement http://www.shadowstats.com/article/no-438-public-comment-on-... Charts: http://www.shadowstats.com/alternate_data/inflation-charts http://www.shadowstats.com/alternate_data/inflation-charts
gruez 5y ago
>If someone buys an 8 unit condo building in 1980 and rents out each unit for a 20% profit, 20 years later they're still making a 20% annualized profit and maybe rent hasn't increased. This doesn't make any sense. You'd expect many of your costs (utility, maintenance, etc) to go up with inflation. >Asset inflation is inflation. That "real" inflation, also known as the consumer price index, hasn't been going up is a factor of both automation/economies of scale and an extremely bifurcated economy in which low end workers are making pennies, toilet paper is cheap, but a house in an area with a working economy costs triple what it did 10 years ago. It costs triple, but because of lower interest rates monthly payments (ie. your actual spend) are going down. https://awealthofcommonsense.com/wp-content/uploads/2021/03/Screenshot-2021-03-20-101503-1024x741.jpg https://awealthofcommonsense.com/wp-content/uploads/2021/03/...
- taurath 5y ago
  I don’t think low interest rates tell even half the story of affordability. 200k at 10% is equivalent to 400k at 3.5%. But we haven’t seen 10% rates since 1989.
  - gruez 5y ago
    It accounts for more than half. Using the st louis fed chart that you linked, housing is up 137% from jan 2000 to jan 2021. If we adjust for interest rates[1] (8% -> 2.3%), that gets us down to 23%. If we adjust for inflation[2], it gets down to 21% lower. [1] https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US [2] https://fred.stlouisfed.org/series/CPIAUCSL https://fred.stlouisfed.org/series/CPIAUCSL
    - taurath 5y ago
      But the point was that the CPI doesn’t accurately track real housing costs. Do you believe housing costs have gone down relative to inflation? Housing costs relative to median income have doubled but that isn’t reflected in CPI data.
      - 5y ago
natural219 5y ago
Toilet paper is cheap? News to me, lol
- taurath 5y ago
  By the CPI standards of what most people actually buy, yes. Think discount grocery stores not top of the line. Kirkland signature/Costco brand basics.
danhak 5y ago
> I posit the "housing" part of the CSI is almost completely inelastic and only reflects what people pay in rent/mortgage, not the cost of entry. This is a really interesting point. A longstanding criticism of the reported unemployment numbers is that it doesn't take into account those who have given up / dropped out of the labor force. Perhaps the CPI is similarly failing to capture people who have been shut out of the housing market altogether (e.g. homeless, staying with family longer than previous generations)
- gruez 5y ago
  > > I posit the "housing" part of the CSI is almost completely inelastic and only reflects what people pay in rent/mortgage, not the cost of entry. but the CPI covers both owners equivalent rent (if you owned your house) and rent (if you rent)? > A longstanding criticism of the reported unemployment numbers is that it doesn't take into account those who have given up / dropped out of the labor force You mean U1-6 that the BLS puts out? There's a good reason for why some are excluded. eg. if you count only the people that are working, then your numbers would be biased if the number of retirees is going up or if people are studying rather than working. Even if you count working age adults it's still problematic because it's affected by people transitioning from/to homemaking. Women entering the workforce would have halved that number, but I doubt people would hail that as some sort of massive victory in terms of unemployment. Likewise just using raw home prices is problematic because it's tied to interest rates (since it's an asset). Raising mortgage rates will certainly drive down housing prices, but whether that's actually better for consumers is debatable. Your purchase price might be lower but your interest would be higher, making it a wash.
  - danhak 5y ago
    > but the CPI covers both owners equivalent rent (if you owned your house) and rent (if you rent)? The hypothesis is that folks have dropped out of the rental market as well (e.g. rents have hit a threshold that's caused people to live with parents longer or even become homeless. I don't think that would be captured in CPI
    - 5y ago
stocknoob 5y ago
Housing costs are up, but we are also consuming more housing (sq foot per capita). Believe It or Not, Real Estate Affordability Hasn’t Changed Much in 40 Years: https://www.supermoney.com/inflation-adjusted-home-prices/ https://www.supermoney.com/inflation-adjusted-home-prices/
- danhak 5y ago
  Perhaps cost per square foot hasn't changed much. But that's irrelevant if there's no more entry-level inventory left for folks who are just starting out.
- taurath 5y ago
  Much of the data in the article support that it’s relatively unaffordable, and that it’s gotten worse over time. Anecdotally, not a single one of my friends parents lived with roommates by 30, but every single person I know has roommates. The factor of square footage can be explained by cheaper materials.
  - lumost 5y ago
    I wonder how much of this is due to shifting housing stock. Were there more 1 bedroom/small 2-bedroom units in the past? Anecdotally in Boston there has been a longstanding push towards "family housing" this results in a relative oversupply of 5+ bedroom units that are almost exclusively leased to large groups.
TiberiusC 5y ago
> If someone buys an 8 unit condo building in 1980 and rents out each unit for a 20% profit, 20 years later they’re still making a 20% annualized profit… I can tell you don’t own any investment properties.
tick_tock_tick 5y ago
Property taxes normally go up with inflation too.
lamontcg 5y ago
> Asset inflation is inflation. It isn't though for the use of the inflation statistic. It is a measure of if low-income earners are going to need wage hikes in order to survive. It is concerned with avoiding wage-price spirals where the cost to businesses of employing your average blue collar worker is increasing or not, and employed to drive those costs to businesses down. It doesn't work at all for the average HN reader because you're probably in the middle ground where you either own enough assets or want to own enough assets that you're seeing crazy rises in prices in how you actually live, but you're not rich enough to care about inflation as a measure of when your uppity blue collar workers are going to start demanding higher pay (and even if you are rich enough, by virtue of the fact you're reading HN you've probably got fewer blue collar workers). The inflation statistic is a number that isn't about you, which is why it seems so weird.
- taurath 5y ago
  Most of my friends are blue collar workers with education being around the national average (“some college”). Practically nobody can afford a place to live without large amounts of roommates as costs have gone up. Housing costs being too high are the #1 economic problem for my generation. Most have decided they will never own a home. Most don’t have much more than a small emergency fund, and many were decimated by covid. Im saying the inflation statistic is used heavily as a catchall for “cost of living” and it values the cost of toilet paper over a roof over people’s heads.
  - lamontcg 5y ago
    Employers aren't concerned with if their employees are renters or owners. You're certainly right it has nothing to do with "cost of living" though.
baryphonic 5y ago
> Housing prices can go up by 20% a year for 5 years and there's still no "inflation". No one will have any idea whether inflation is happening or not by looking at a single market. That's why CPI doesn't do that. Housing prices could increase 2.5x in five years and not be an indicator of inflation, although that seems unlikely. But without examining a large sample of other markets, it's nearly a pure guess. > Here's the problem - we use the Consumer Price Index to measure inflation, of which "housing" is only 33% - much of which is actually rent, which is quite a bit more inelastic than home prices. Demand for housing across the board is inelastic (notwithstanding vacation homes or other "second" homes, in which demand is elastic and also a very niche market). Demand for credit is elastic, and so increases in the price of credit, i.e. the interest rate, will cause potential home-buyers to substitute into being renters. > If someone buys an 8 unit condo building in 1980 and rents out each unit for a 20% profit, 20 years later they're still making a 20% annualized profit and maybe rent hasn't increased. There's not enough information here to understand this scenario. It's not at all obvious that the landlord in 2000 is making an annualized profit of 20% unless he's the king of slum lords. Not only will maintenance and other recurring costs increase as inflation increases, the opportunity cost of the landlord using the land to house renters as compared to other productive uses of the land will also increase in nominal terms (and probably also in real terms unless the local economy is dysfunctional). Those costs - both the accounting and opportunity costs - will be passed onto the renters. > Asset inflation is inflation. Typically in economics, an increase in the "general price level" is inflation. In micro terms, inflation means the aggregated prices across all markets have increased relative to money, i.e. the increase is not accounted for by income or substitution effects. This doesn't mean all markets will be affected with equal price increases or anything. We'd still expect markets with inelastic demand to have higher price increases and markets with very elastic demand to have small price increases (though competitive markets will probably also have some shenanigans with quantity restriction, which aren't captured by the supply-demand model). We'd also expect some noise from various markets due to peculiar circumstances unique to each market. E.g. a potato blight creates a supply shock that causes a drastic increase in the price of potatoes, and which could have ripples in decreases in prices of complements and increases in prices of substitutes which is non-inflationary. > That "real" inflation, also known as the consumer price index, hasn't been going up is a factor of both automation/economies of scale and an extremely bifurcated economy in which low end workers are making pennies, toilet paper is cheap, but a house in an area with a working economy costs triple what it did 10 years ago. CPI is just a measure of inflation, i.e. the general increase in prices across aggregated markets, that uses sampling. (Also, the word "real" is overloaded in economics, and means changes that take into account inflation or, alternatively, ignore the use of money.) Inflation is quite tricky to measure, and so CPI must make loads of assumptions about substitutes, complements, and income effects (e.g. technological progress, economies of scale, productivity, etc.). Also, for point of comparison, the minimum wage in CA has doubled since 2001, but the price level has not. It's a similar story in New York, Massachusetts, Illinois and Washington (and presumably other blue states). Red states like Texas or Florida have not had a significant de jure increase beyond the federal level in that time, though if I were to guess, the market minimum wage is simply above the legal minimum wage in those areas. It seems likely that low-end workers are making more, middle-income workers have stagnated and then upper-income workers have seen their income skyrocket.
Aa9C4xPz43Gg7k6 5y ago
This is by design. CPI is meant to hand wave inflation away. Stocks, houses and hundred other things fly to the moon but there's no inflation according to CPI (almost none).

ethdkreuoreuc 5y ago

Rent is up more than 9% this year alone. Inflation is now large enough to show up in the CPI in a significant way.

lostlogin 5y ago

> 20 years later they're still making a 20% annualized profit and maybe rent hasn't increased. You live in a very different region to me. I just checked and it’s hovering at about 3%, and this is causing a lot of problems.

nszceta 5y ago

Please read this article in its entirety to understand how we go to where we are today. http://www.shadowstats.com/article/no-438-public-comment-on-inflation-measurement http://www.shadowstats.com/article/no-438-public-comment-on-... Charts: http://www.shadowstats.com/alternate_data/inflation-charts http://www.shadowstats.com/alternate_data/inflation-charts

gruez 5y ago

>If someone buys an 8 unit condo building in 1980 and rents out each unit for a 20% profit, 20 years later they're still making a 20% annualized profit and maybe rent hasn't increased. This doesn't make any sense. You'd expect many of your costs (utility, maintenance, etc) to go up with inflation. >Asset inflation is inflation. That "real" inflation, also known as the consumer price index, hasn't been going up is a factor of both automation/economies of scale and an extremely bifurcated economy in which low end workers are making pennies, toilet paper is cheap, but a house in an area with a working economy costs triple what it did 10 years ago. It costs triple, but because of lower interest rates monthly payments (ie. your actual spend) are going down. https://awealthofcommonsense.com/wp-content/uploads/2021/03/Screenshot-2021-03-20-101503-1024x741.jpg https://awealthofcommonsense.com/wp-content/uploads/2021/03/...

taurath 5y ago
I don’t think low interest rates tell even half the story of affordability. 200k at 10% is equivalent to 400k at 3.5%. But we haven’t seen 10% rates since 1989.
- gruez 5y ago
  It accounts for more than half. Using the st louis fed chart that you linked, housing is up 137% from jan 2000 to jan 2021. If we adjust for interest rates[1] (8% -> 2.3%), that gets us down to 23%. If we adjust for inflation[2], it gets down to 21% lower. [1] https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US [2] https://fred.stlouisfed.org/series/CPIAUCSL https://fred.stlouisfed.org/series/CPIAUCSL
  - taurath 5y ago
    But the point was that the CPI doesn’t accurately track real housing costs. Do you believe housing costs have gone down relative to inflation? Housing costs relative to median income have doubled but that isn’t reflected in CPI data.
    - 5y ago

natural219 5y ago

Toilet paper is cheap? News to me, lol

taurath 5y ago
By the CPI standards of what most people actually buy, yes. Think discount grocery stores not top of the line. Kirkland signature/Costco brand basics.

danhak 5y ago

> I posit the "housing" part of the CSI is almost completely inelastic and only reflects what people pay in rent/mortgage, not the cost of entry. This is a really interesting point. A longstanding criticism of the reported unemployment numbers is that it doesn't take into account those who have given up / dropped out of the labor force. Perhaps the CPI is similarly failing to capture people who have been shut out of the housing market altogether (e.g. homeless, staying with family longer than previous generations)

gruez 5y ago
> > I posit the "housing" part of the CSI is almost completely inelastic and only reflects what people pay in rent/mortgage, not the cost of entry. but the CPI covers both owners equivalent rent (if you owned your house) and rent (if you rent)? > A longstanding criticism of the reported unemployment numbers is that it doesn't take into account those who have given up / dropped out of the labor force You mean U1-6 that the BLS puts out? There's a good reason for why some are excluded. eg. if you count only the people that are working, then your numbers would be biased if the number of retirees is going up or if people are studying rather than working. Even if you count working age adults it's still problematic because it's affected by people transitioning from/to homemaking. Women entering the workforce would have halved that number, but I doubt people would hail that as some sort of massive victory in terms of unemployment. Likewise just using raw home prices is problematic because it's tied to interest rates (since it's an asset). Raising mortgage rates will certainly drive down housing prices, but whether that's actually better for consumers is debatable. Your purchase price might be lower but your interest would be higher, making it a wash.
- danhak 5y ago
  > but the CPI covers both owners equivalent rent (if you owned your house) and rent (if you rent)? The hypothesis is that folks have dropped out of the rental market as well (e.g. rents have hit a threshold that's caused people to live with parents longer or even become homeless. I don't think that would be captured in CPI
  - 5y ago

stocknoob 5y ago

Housing costs are up, but we are also consuming more housing (sq foot per capita). Believe It or Not, Real Estate Affordability Hasn’t Changed Much in 40 Years: https://www.supermoney.com/inflation-adjusted-home-prices/ https://www.supermoney.com/inflation-adjusted-home-prices/

danhak 5y ago
Perhaps cost per square foot hasn't changed much. But that's irrelevant if there's no more entry-level inventory left for folks who are just starting out.
taurath 5y ago
Much of the data in the article support that it’s relatively unaffordable, and that it’s gotten worse over time. Anecdotally, not a single one of my friends parents lived with roommates by 30, but every single person I know has roommates. The factor of square footage can be explained by cheaper materials.
- lumost 5y ago
  I wonder how much of this is due to shifting housing stock. Were there more 1 bedroom/small 2-bedroom units in the past? Anecdotally in Boston there has been a longstanding push towards "family housing" this results in a relative oversupply of 5+ bedroom units that are almost exclusively leased to large groups.

TiberiusC 5y ago

> If someone buys an 8 unit condo building in 1980 and rents out each unit for a 20% profit, 20 years later they’re still making a 20% annualized profit… I can tell you don’t own any investment properties.

tick_tock_tick 5y ago

Property taxes normally go up with inflation too.

lamontcg 5y ago

> Asset inflation is inflation. It isn't though for the use of the inflation statistic. It is a measure of if low-income earners are going to need wage hikes in order to survive. It is concerned with avoiding wage-price spirals where the cost to businesses of employing your average blue collar worker is increasing or not, and employed to drive those costs to businesses down. It doesn't work at all for the average HN reader because you're probably in the middle ground where you either own enough assets or want to own enough assets that you're seeing crazy rises in prices in how you actually live, but you're not rich enough to care about inflation as a measure of when your uppity blue collar workers are going to start demanding higher pay (and even if you are rich enough, by virtue of the fact you're reading HN you've probably got fewer blue collar workers). The inflation statistic is a number that isn't about you, which is why it seems so weird.

taurath 5y ago
Most of my friends are blue collar workers with education being around the national average (“some college”). Practically nobody can afford a place to live without large amounts of roommates as costs have gone up. Housing costs being too high are the #1 economic problem for my generation. Most have decided they will never own a home. Most don’t have much more than a small emergency fund, and many were decimated by covid. Im saying the inflation statistic is used heavily as a catchall for “cost of living” and it values the cost of toilet paper over a roof over people’s heads.
- lamontcg 5y ago
  Employers aren't concerned with if their employees are renters or owners. You're certainly right it has nothing to do with "cost of living" though.

baryphonic 5y ago

> Housing prices can go up by 20% a year for 5 years and there's still no "inflation". No one will have any idea whether inflation is happening or not by looking at a single market. That's why CPI doesn't do that. Housing prices could increase 2.5x in five years and not be an indicator of inflation, although that seems unlikely. But without examining a large sample of other markets, it's nearly a pure guess. > Here's the problem - we use the Consumer Price Index to measure inflation, of which "housing" is only 33% - much of which is actually rent, which is quite a bit more inelastic than home prices. Demand for housing across the board is inelastic (notwithstanding vacation homes or other "second" homes, in which demand is elastic and also a very niche market). Demand for credit is elastic, and so increases in the price of credit, i.e. the interest rate, will cause potential home-buyers to substitute into being renters. > If someone buys an 8 unit condo building in 1980 and rents out each unit for a 20% profit, 20 years later they're still making a 20% annualized profit and maybe rent hasn't increased. There's not enough information here to understand this scenario. It's not at all obvious that the landlord in 2000 is making an annualized profit of 20% unless he's the king of slum lords. Not only will maintenance and other recurring costs increase as inflation increases, the opportunity cost of the landlord using the land to house renters as compared to other productive uses of the land will also increase in nominal terms (and probably also in real terms unless the local economy is dysfunctional). Those costs - both the accounting and opportunity costs - will be passed onto the renters. > Asset inflation is inflation. Typically in economics, an increase in the "general price level" is inflation. In micro terms, inflation means the aggregated prices across all markets have increased relative to money, i.e. the increase is not accounted for by income or substitution effects. This doesn't mean all markets will be affected with equal price increases or anything. We'd still expect markets with inelastic demand to have higher price increases and markets with very elastic demand to have small price increases (though competitive markets will probably also have some shenanigans with quantity restriction, which aren't captured by the supply-demand model). We'd also expect some noise from various markets due to peculiar circumstances unique to each market. E.g. a potato blight creates a supply shock that causes a drastic increase in the price of potatoes, and which could have ripples in decreases in prices of complements and increases in prices of substitutes which is non-inflationary. > That "real" inflation, also known as the consumer price index, hasn't been going up is a factor of both automation/economies of scale and an extremely bifurcated economy in which low end workers are making pennies, toilet paper is cheap, but a house in an area with a working economy costs triple what it did 10 years ago. CPI is just a measure of inflation, i.e. the general increase in prices across aggregated markets, that uses sampling. (Also, the word "real" is overloaded in economics, and means changes that take into account inflation or, alternatively, ignore the use of money.) Inflation is quite tricky to measure, and so CPI must make loads of assumptions about substitutes, complements, and income effects (e.g. technological progress, economies of scale, productivity, etc.). Also, for point of comparison, the minimum wage in CA has doubled since 2001, but the price level has not. It's a similar story in New York, Massachusetts, Illinois and Washington (and presumably other blue states). Red states like Texas or Florida have not had a significant de jure increase beyond the federal level in that time, though if I were to guess, the market minimum wage is simply above the legal minimum wage in those areas. It seems likely that low-end workers are making more, middle-income workers have stagnated and then upper-income workers have seen their income skyrocket.

Aa9C4xPz43Gg7k6 5y ago

This is by design. CPI is meant to hand wave inflation away. Stocks, houses and hundred other things fly to the moon but there's no inflation according to CPI (almost none).