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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (30296)	4/28/2005 4:03:51 PM
From: Les H	Read Replies (2) \| Respond to of 306849

Nothing comes close to signifying the reemergence of an inflationary psychology in the US than the run-up in housing prices, fueled by abundant, cheap mortgage financing and homebuyers who are shunning other assets, especially equities and equity mutual funds, because of perceived risks. Presumably they see little risk in the housing market and are rushing out to buy new and existing homes before prices go up further. That is a classic manifestation of a growing inflationary mentality, and the Federal Reserve, in the minutes of the December FOMC policy meeting, called attention to speculative behavior in the housing market. However, the methodology by which the Bureau of Labor Statistics computes the consumer price index does not show anything remotely resembling this frantic behavior. Home prices do not appear directly at all in the two main consumer price indexes in the US, the CPI and the separate personal consumption expenditure price index (PCEPI) calculated by the Bureau of Economic Analysis as part of the exercise for determining nominal and real GDP. They use a concept called "owners' equivalent rent of primary residence." They survey the small number of homes that are rented and then make the assumption that homeowners pay themselves a rent equivalent to what is happening in this narrow rental market for single-family homes. This category carries the single-most important weight in the calculation of the CPI (although it has a much lesser weight in the PCEPI). And it is up only a modest 2.3% over the past twelve months, a tiny fraction of home price rises in the marketplace. While most economists support the methodology behind the calculation, the huge disparity raises serious questions about whether the consumer price index is understating the inflationary consequences of rising home prices. cfr.org