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Why the government took home prices out of its main inflation index
- alephnan 4y ago
- gilbetron 4y agoDid you read the article? There's a paper that recreated what the inflation rate would have been with the old method, and it tracks the new method closely, but just has more volatility.
- glowingly 4y agoWhile I do like the latter, a house is a fairly rare purchase in one's life. Admittedly, a very major, rare purchase. But typically a rare one nonetheless. My weekly grocery runs are more indicative of CPI to me.
- boredumb 4y agoSure, but housing prices will directly effect the price someone can buy and offer it to be rented out which has a huge monthly effect on a large portion of the population.
- s1artibartfast 4y agoYes, which is why they include rent and the rental value for purchased homes
- lupire 4y agoRare for you an individual, but on overall common. Catastrophic medical expenses and college are similar, and inflation in those is very important overall.
- bobthehomeless 4y agorarely do people buy houses (for living) with cash.
- KptMarchewa 4y agoRare one, but mortgage payments can impact your life even some decades later.
- Loughla 4y agoYour statement is actually addressed in tfa, in the first couple of paragraphs (now, it's in the context of a switch made to the index in 1983, but I think it's just as relevant today): >This methodological innovation understandably sets off alarm bells among people who are predisposed to distrust the government.
- gilbetron 4y agoFor those that only read the headline, the article is much more interesting. There's a paper that recreated what the inflation rate would have been with the old method, and it tracks the new method closely, but just has more volatility. Plus, "the government" didn't take home prices out, they just switched to a different approach to tracking them.
- sokoloff 4y agoI think the “new” (now 39 years old) method is superior overall, but I think it’s entirely factually correct that they took home prices out of the index. They did not take housing expenses out, which is what many people whose sole exposure to economics is via memes seem to think/be encouraged to think.
- lumost 4y agoI think the methodological flaw here is the assumption that nominal housing prices are elastic. Housing expenses fell over the last ~30 years as interest rates fell, however it's highly unlikely that the reverse will hold true to the same tune. If interest rates go to 10%, people will stop trading housing rather than take a nominal hit and be under water on a mortgage. This means that as interest rates rise, housing expenses may spike - forcing employees to demand more money. Given the size of the housing budget in many households, this effect could be surprisingly strong.
- imtringued 4y agoWhat people don't seem to understand is that the interest rate doesn't really change your monthly payment in aggregate for housing as you are competing with other people on the monthly payment who get roughly the same interest rate. If the interest rate goes up, more of your monthly payment goes to the bank and less to the existing homeowner. This is only beneficial if you can buy a house outright with cash i.e. the rich get to buy the dip.
- sokoloff 4y agoI think house sale prices are well understood to be sticky. (Sellers really hate the thought of bringing a check to the closing, so when prices are such that their equity after commission goes negative, housing listings and sales do indeed slow down.) I don't think the CPI methodology makes any assumption about elasticity of any particular component, though; it's a measurement process. People who are making interpretations or predictions based on CPI might be using faulty assumptions.
- sokoloff 4y ago> Counting both the home purchase price and mortgage payments was double counting. That seems so blindingly obvious a flaw in the old methodology that I’m surprised that was ever implemented in the first place.
- pmyteh 4y agoOften the first implementation is almost an MVP (we have no data on this, let's get some!) and once it's in place it has some inertia. Think of the Dow Jones Industrial Average. Nobody would construct a price-weighted index today: it has some really poor properties that are avoided by weighting by market capitalisation instead. But the Dow sails on.
- lupire 4y ago> In 1983, the BLS switched to a new method called owners’ equivalent rent. A big problem in the housing debate is that almost everyone (lay people, media, politicians, advocates) carelessly conflate "houses", "homes" (including apartments/condos), "real estate/property" (land + structure), and "housing" (including buying and renting), and don't even try to factor in interest rate effects, so all the math is just nonsense mixing apples and sharks.
- hnthrowaway0315 4y agoI think one should have one's own inflation index. Basically I'd layout the expenses (food, utility, mortgage, child day care, etc.) and go from there. Some expenses inflates every year (food/utility), some are fixed for 5 years and then maybe jump up/down (mortgage, depending if Fed is cutting or hiking rates).
- nradov 4y agoWhat would I do with that data?
- sokoloff 4y agoThat sounds like a budget, which is indeed a good thing to have but answers very different questions from a broad-based inflation calculation.
- chii 4y agoif they normalized the budget such that extra things not purchased in previous years is not taken into account, it could be used as a personal inflation measure. Normalizing the budget means you remove any life-style creep that gets in. This way, you can look at your salary, and determine whether you're gaining income above your own inflation, or not.
- sokoloff 4y agoNormalizing the budget that way would seem to be incredibly difficult at a personal level. If I started buying a better cut of steak or more hamburger and less ramen than last year, would I really be able to tease out that difference without an insane amount of record keeping/data entry?
- axg11 4y agoThis would be a cool idea for a service - I would pay for it. Privacy issues aside, it's a shame that transaction data doesn't include itemized information (e.g. grocery bills only show up as one large charge). I'm sure there are many items I regularly purchase that have changed price without me noticing.
- bobthehomeless 4y ago
- thawaya3113 4y agoThe big problem is people believing that there is any one such thing as inflation. There isn’t. The word inflation represents many, including wildly divergent, ideas. And many of the very different things represented by inflation serve very different purposes, and that’s why they’re changed, because different measures of inflation help measure different concepts. Core inflation is just one of many different measures of inflation.
- KptMarchewa 4y agoSure, everyone has it's own personal inflation, but I don't see why can't we look at aggregate data.
- yossarian1408 4y agoIt's not even that. There are different drivers of inflation, it could be spurred by supply shocks, increased demand, greater supply of money, uncompetitive markets arising from government capture, etc., the economy is so complex that when you consider all these moving parts, a claim like "interest rates go down, inflation goes up" starts to sound incredibly reductive.
- dopylitty 4y agoThis is a good point. The government really shouldn’t be producing a single number and saying that’s “the” inflation rate. It muddies the waters and makes it easy to think that the economy is some magic system where things just happen rather than the sum of choices by individual companies and consumers. If OPEC decided to stop producing oil altogether you bet there would be “inflation” caused by oil prices but that doesn’t mean the FED should be goaded into making changes to policy.
- nradov 4y agoThe government doesn't produce a single number. The BLS produces multiple numbers and you can use whichever one fits your situation best.
- recursivedoubts 4y agohttps://www.longtermtrends.net/home-price-median-annual-income-ratio/ https://www.longtermtrends.net/home-price-median-annual-inco... nb that there is little relation to interest rates, which have been steadily declining since 82: https://www.freddiemac.com/pmms https://www.freddiemac.com/pmms with the recent spike, we are currently at ~2000 interest rates, when homes were at 4x incomes, rather than 7+x home prices have been absolutely bonkers, with two massive bubbles (we are in one right now) and the fact that this doesn't show up proportionally in inflation numbers is either malicious, stupid or both the really psychotic aspect of this all is that in the long run it will destroy the economy as family formation craters (too expensive to start a family) maybe that's the idea, I can't make much sense of it
- imtringued 4y agoHousing is an investment, you're not meant to live in it. Money is also an investment, you're not supposed to use it as a medium of exchange. Go kneel and beg in front of the owners of capital and land. Your concerns will be ignored. You think this is psychotic? I doubt that, I can guarantee that secretly you are thinking the same thing. You would rather see yourself and everyone else around you suffer, for a chance to become one of the corrupted yourself. The "working class" does not derive anything from interest and capital gains. It pays more in that it could possibly get back. It is in its collective interest to abolish all rent seeking and let capital yields and profits shrink to 0% as perfect market theory predicts. But no, everyone wants to start their own feudal little dynasty. Eternally passing our obligation to work for them to their descendants, despite the fact that we won't be alive when those descendants are alive, forcing us to pass the debt onto our own descendants.
- kasey_junk 4y agoThe Case Shiller index shows affordability was similar in the early 50s to now, that was the heart of the baby boom so I think we can predict that won’t be the reason people don’t start families. The article actually mentions that on an inflation adjusted basis the monthly mortgage was the same now as in the early 80s (due to interest rate differences). It’s basically not true that housing costs are categorically different than any other time.
- acd 4y agoI still argue for that central banks got inflation wrong. Central banks set inflation target to to percent to try and control wage inflation. But wage inflation are globalized. So I argue that central banks tried to control local wage increase on a globalized market which is impossible. Central banks cannot control price increases on global market. Also central banks did not take into account increased housing prices in inflation data. Central cannot control energy price increase/decrease. central banks cannot control global wage levels. Thus central banks cannot control inflation in a global market. However interest rates set by central banks greatly effect housing prizes since people calculate what mortage they can afford monthly given bank interest rate. This inflation rate vs manipulation of interest rate by central banks has inflated house prices.
- throw0101a 4y ago> Thus central banks cannot control inflation in a global market. Japan enters the chat https://fred.stlouisfed.org/series/FPCPITOTLZGJPN https://fred.stlouisfed.org/series/FPCPITOTLZGJPN
- cjmb 4y agoThis is actually a picture of national failure, tantamount to celebrating a blowout losing scoreboard. It is not a model for others to copy. Productivity and inflation are very related to each other. Per your chart, "Japan enters the chat" in the mid 1980s. If you're curious what has happened to Japan since the mid 1980s you can read https://en.wikipedia.org/wiki/Lost_Decades https://en.wikipedia.org/wiki/Lost_Decades (this wikipage was pluralized from "Decade" to "Decades" in the last couple of years, due to the continued struggles of the Japanese economy). To the extent that you hold central banks responsible for the national-economic state of things, Japan's central bank ought to be considered a massive failure. If you lean towards the Krugman side of things, you can find his explanation of that failure here: https://web.archive.org/web/20161203180303/https://krugman.blogs.nytimes.com/2015/10/20/rethinking-japan/ https://web.archive.org/web/20161203180303/https://krugman.b... If you prefer the Scott Sumner side, you can find his explanation of that failure here: https://www.themoneyillusion.com/why-japans-qe-didnt-work/ https://www.themoneyillusion.com/why-japans-qe-didnt-work/ https://www.themoneyillusion.com/the-other-money-illusion/ https://www.themoneyillusion.com/the-other-money-illusion/ https://www.themoneyillusion.com/rooseveltian-resolve/ https://www.themoneyillusion.com/rooseveltian-resolve/ Personally, I tend to sympathize with central banks and take a more muted view of their powers at the national-economic level. In my model, Japan's central bank was/is powerless given the magnitude of non-financial headwinds the country face(d) after the opening of China and beneath 2 decades of aggressive anti-Japanese trade policy from their largest trading partner (USA). This is a (slightly) heterodox take, and you can read my articulation of this view here: https://www.conradbastable.com/essays/unequal-growth-the-zero-sum-games-you-dont-see#1999 https://www.conradbastable.com/essays/unequal-growth-the-zer... But whatever your take, Japan's economic struggles should not be mistaken for signals of success.
- havblue 4y agoA partial problem about cpi, as the article discusses, is that it's about what's consumed. So it's primarily beneficial for people living paycheck to paycheck and less beneficial for people trying to sort out the harder-to-commodify question of quality of life.
- book_mike 4y agoIgnoring what the value of a currency may be I wish buyers would reject bad prices. I really care about what the actual cost of a thing is from dirt to package. The companies that market, make and deliver products should make a profit but I'm not buying their Ferrari. Capitalism start with "No deal, not at that price."
- ClumsyPilot 4y agoProblem is the amount of money people will pay for a place to live is unlimited. If people would take 300 year mortgages that would put your kids into debt bondade if thry could
- mywittyname 4y agoA 30 year mortgage is just below the threshold of being an interest only mortgage. Especially when looked through the lens of a 10 year length of stay in a house. Ten years into a 30 year mortgage, one will have paid something like 60% of the total interest on the loan.
- hattmall 4y agoCapitalism begins to break down when the primary driver of purchasing power is availability of debt. Long term debt is particularly antithetical to the efficiencies promoted by a free market. Add on the fact that a quasi-government body is the primary provider of that debt and not just through the central banking system but in many cases direct to consumers.
- yossarian1408 4y agoSounds less like capitalism breaking down and more like a regulatory issue.. could fractional reserve banking exist in a competitive banking sector w/o a central bank?
- Barrera 4y agoIn a nutshell: > The price of the home has risen by 20 percent, so you could just say the cost of housing has gone up 20 percent. But that would be misleading. Assuming a 20 percent down payment, your original mortgage would have cost $2,502 per month, while the new owner’s mortgage would cost $2,489 per month. The monthly mortgage payment required to own the home actually went down. Falling interest rates have kept houses affordable at inflated prices. Because most housing is purchased with debt, the change reflects the reality that most owners are paying off a mortgage. The change made by government prevents interest rate fluctuations from interfering with the CPI calculation. Over time, the change resulted in less volatility of the CPI, but no major changes when viewed from a multi-year perspective.
- djoldman 4y agoThe complexity is this: > Suppose you buy a home for $500,000, financing the purchase with a mortgage at a 6.4 percent interest rate. A few years later, you sell for $600,000. Interest rates have fallen, and the new buyer is able to get a mortgage at 4.7 percent. > The price of the home has risen by 20 percent, so you could just say the cost of housing has gone up 20 percent. But that would be misleading. Assuming a 20 percent down payment, your original mortgage would have cost $2,502 per month, while the new owner’s mortgage would cost $2,489 per month. The monthly mortgage payment required to own the home actually went down.
- JohnJamesRambo 4y agoBut someone made $100k in a sale a few years later…
- diogenescynic 4y agoThe original home owners could also refinance at the lower rate. And when they buy a new home it would also be at the lower rate (and higher sale price).
- isubkhankulov 4y agoDo you have to subtract the mortgage interest expenses from $100k to get closer to their true net profit?
- jjslocum3 4y agoMortgage loan officers (and also car salesmen) do all in their power to redirect people away from the fact that they're going to fork over e.g. $600k in total interest and principle for a $300k sticker-price house over 30 years. They do this by focusing on the monthly payment rather than the actual total spend. Convincing buyers that monthly out-of-pocket spend is somehow a proxy for the actual purchase price is a powerful tool that, while not technically deceptive (you do, after all, have to sign a Truth-in-Lending statement when you finance a house), absolutely causes people to spend more than they otherwise would. But since the total lifetime spend on a house is absolutely lower if the interest rate over the life of the loan is lower, then it's true that lower interest rates make homes cheaper over their lifetimes. I don't understand why the writer of this article would chose to focus on the deceptive monthly payment argument rather than the concrete interest-rate argument.
- Decabytes 4y agoI was pleasantly surprised that Rocket Mortgage (Formerly Quicken Loan) actually has a calculator on the dashboard when I view my loan information that shows me how much interest I'll pay over the lifetime of the loan. I can even change my monthly payments and see how it will effect the lifetime interest of my loan and how much faster I will pay it off.
- thathndude 4y agoUnder federal law, when you get your credit card bill, the bank is required to include a breakdown of, for example, how long you have to pay if you only make the minimum payment, and how much your total payments will be if you only make the minimum payment. We need something similar and conspicuous for mortgages. Let people really see/feel the interest. Another way I’ve seen it phrased is in terms of buying power, and I think that can be effective. I’m ball parking some numbers here, but I think I saw something along the lines of, for the same monthly payment you can buy a $275,000 house with 5% interest or a $350,000 house at 3% interest. I think that drives the point a bit
- sokoloff 4y ago
- FollowingTheDao 4y ago"The example that comes up most often is housing. Critics point back to the early 1980s, when the Bureau of Labor Statistics (BLS) made a fundamental shift in the way it calculates the consumer price index (CPI) for shelter." Why did the BLS do this in the 1980's, no one is asking? Well, I will tell you, in a another simple chart: https://www.macrotrends.net/2015/fed-funds-rate-historical-chart https://www.macrotrends.net/2015/fed-funds-rate-historical-c... Check out where the FED rate was in the 1980's. TLDR, they did not want housing prices to be included in inflation since they knew they were going to go on this rate lowering binge which would increase the price of housing. The folks in that article are trying to tell you housing prices are cheaper because you are paying less per month???? What???? HA! No, they are hiding inflation by using rent equivalent, which is not even close to the real rent prices. If you are paying more to own a house (if you still have a mortgage you do not own your house) then housing is no2 more affordable! Wow, the doublespeak!!!
- nikanj 4y agoRent goes from $1400 to $1850, but inflation only went up by a few fractions of a percent? Downpayment needed for a family home went from $10k to $75k, and inflation was under 2%? The numbers posted are wholly disconnected from the reality in our wallets.
- lr4444lr 4y agoNaive question: why couldn't the government use something like a 12 month moving average? That way we'd keep the variable, but limit the weight of its volatility.
- asperous 4y agoYou can do this across the whole index if you want already, and many sources do report annual changes only: https://fred.stlouisfed.org/series/FPCPITOTLZGUSA https://fred.stlouisfed.org/series/FPCPITOTLZGUSA As for why a moving average isn't used for this one price, if they did it that way prices would be 12 months old and wouldn't reflect the most up-to-date economic conditions.
- cudgy 4y ago“Suppose you buy a home for $500,000, financing the purchase with a mortgage at a 6.4 percent interest rate. A few years later, you sell for $600,000. Interest rates have fallen, and the new buyer is able to get a mortgage at 4.7 percent. The price of the home has risen by 20 percent, so you could just say the cost of housing has gone up 20 percent. But that would be misleading. Assuming a 20 percent down payment, your original mortgage would have cost $2,502 per month, while the new owner’s mortgage would cost $2,489 per month. The monthly mortgage payment required to own the home actually went down.” This calculation ignores the down payment, which would be $20,000 more for the buyer a few years later. Seems like a better comparison is to amortize the down payment somehow into the calculation, since buyers have to save up for the down payment while renting prior to their first home. Anyways, the full costs of purchase are not accounted for with this method. Also, what about the other necessary costs of owning a home like closing costs, real estate commissions, insurance, property taxes, pest control, repairs, hoa fees, etc?