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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (78822)	3/30/2000 11:27:00 AM
From: Les H	Respond to of 132070

Housing is important to financial markets professionals for another reason: it accounts for the largest share -- almost 40 percent -- of the consumer price index. If housing acts up, the tame core inflation of recent years is history. The largest component in the CPI's housing category is shelter, with a weighting of 30 percent (of the CPI). Within shelter, there's rent of primary residence (7 percent); lodging away from home (2.4 percent); owners' equivalent rent of primary residence (20.5 percent); and tenants' and household insurance (0.4 percent). Taken together, the rental components account for more than one quarter of the CPI. In 1999, the CPI rose 2.7 percent while owners' equivalent rent (OER) and residential rents (RR) rose 2.4 percent and 3.1 percent, respectively. House Not a Home These hybrid rent categories are not an attempt to measure home prices. A home is considered to be an investment; it goes into the ``I' component of GDP. It also shows up as a personal consumption expenditure (the imputed rental value) and as personal income (the imputed rent received). If the price of housing goes up, ``it's not the same as the price of food or clothing going up,' Carliner says. ``It's not a higher cost for the homeowner.' Prior to 1983, the Bureau of Labor Statistics used an asset approach to home ownership cost, including home prices, mortgage interest costs, property insurance and taxes, and maintenance and repair in the shelter component of the CPI, says BLS economist Pat Jackman. Today's rent components are determined by a single sample survey of rental units, with different weightings assigned for each category. For example, a rental unit in an owner-dominated area would get a high weight in OER and a low rate in RR. A rental unit in an area dominated by renters gets a high weight in RR and low weight in OER. Retaining Wall Because the booming economy has enabled more renters to become first-time homeowners, the rental components of the CPI may be understating the inflation rate, according to Henry Willmore, chief U.S. economist at Barclays Capital Group. ``Vacancy rates have been on the rise because of the increase in the home-ownership rate,' Willmore says. Vacancy rates have crept up from 7.3 percent in 1993 to 8.1 percent in 1999. At the same time, home ownership rates, 'which were stable for a decade at 64 percent, rose 3 percentage points to 67 percent from 1995 through 1999,' Willmore says. Since the BLS uses rental units as a proxy for the owners' market, and rental demand has softened, the effect has been ``to bias OER and housing down,' he adds. Housing costs as expressed in the CPI may be starting to catch up with what folks perceive is going on with housing in the real world. (Jackman says that over a 5- to 10-year period, rents correlate well with home prices. Carliner says rents aren't a good measure of home prices, even over a long period of time.) In the three months ended February, RR and OER rose at a 3.6 and 3.1 percent annualized rate, respectively. Housing prices, as measured by a repeat sales index compiled by the Office of Federal Housing Enterprise Oversight, rose 5.9 percent in the fourth quarter compared with the fourth quarter of 1998. This series bottomed in the fourth quarter of 1990 at 0.3 percent. Fancy that. Right in the middle of the last recession! As industries go, housing may be strictly Old Economy. In its ability to predict the future, it can hold its own against anything the New Economy has to offer. quote.bloomberg.com