The Fed’s core concern comes from the out-sized influence of housing services on the PCE (Personal Consumption Expenditures): “Given that housing services constitutes the largest subcomponent of PCE, accounting for roughly 18% of total consumption expenditures, the impact of housing services inflation on overall PCE inflation is always significant.” In other words, I interpret the Fed’s recent religion on normalizing interest policy as a belated attempt to cool down price appreciation in the housing market.

The St. Louis Fed also put this concern in context by comparing today’s inflation with the inflation from the last economic expansion from July 2010 to January 2020. Interestingly each of the three components of the PCE – durable goods, non-durable goods, and services – have contributed around the same amount of extra inflationary pressure in absolute terms, ranging from 1.46 to 1.71 percentage points. However, with a 65% of total consumption expenditures, the promise of on-going upward pressure on services inflation promises to drive the overall PCE ever higher. The Fed finally could no longer sit still on rates.

(For a good read on belated inflation concerns, review Jason Furman’s critique of the economics profession: “Why Did Almost Nobody See Inflation Coming?“)

Be careful out there!

Full disclosure: no positions

The post The Federal Reserve Fears On-Going Inflationary Pressures from Rents appeared first on Inflation Watch.

“The real estate gains in the valley, located primarily in the San Jose metropolitan area, are mostly occurring in towns where million-dollar values are already the norm. The median price in Cupertino gained 12 percent last month from May 2010 to $1.08 million, and values in Saratoga rose 4.7 percent to $1.62 million, according to San Diego-based DataQuick…

…The median price of single-family houses sold in Palo Alto, home of Facebook Inc., climbed 20 percent in May from a year earlier to $1.63 million, the biggest jump since 2008, according to preliminary figures from research company DataQuick. In Mountain View, the base of LinkedIn Corp., prices rose 3.1 percent to $957,500, the ninth year-over-year gain in 12 months.”

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“Sales of detached homes, townhouses and condominiums in metropolitan Vancouver jumped 70 percent in February from January, to 3,097 units from 1,819, and were up 25 percent from a year earlier, according to the Real Estate Board of Greater Vancouver. In March, sales climbed 32 percent from February, to just shy of a record for the month of 4,371 transactions set in 2004. Sales increased by 80 percent from two years ago.”

“In 2010, Vancouver had the third-highest housing costs among English-speaking cities worldwide, according to Canada’s Frontier Centre for Public Policy. Only Hong Kong and Sydney, another magnet of Asian immigration, were more expensive. Vancouver’s median home price of C$602,000 ($618,000) was 9.5 times the annual median household income of C$63,100, the group said in a study released Jan. 24. Canada had a 4.6 national multiple, making it ‘seriously unaffordable,’ while the U.S. at 3.3 was ‘moderately unaffordable,’ the study showed. To be affordable, the multiple must be 3 or less.”

The rest of the article explains how buyers from China are helping to drive prices in Vancouver as they escape property restrictions back home. Given three waves of Chinese buyers have descended upon Vancouver since 1990, market participants must feel like everything is normal. As an outsider, this market seems to have all the classic markers of a bubble. As long as the money keeps flowing, the market will remain inflated…

The post Vancouver Housing Keeps On Soaring appeared first on Inflation Watch.

Most interesting was the core CPI, CPI less energy and food, remained flat. Most notable amongst the basket of items was apparel and shelter. These are the only two items that have declined in price over the past 12 months, and their monthly price changes for August were also amongst the lowest, -0.1% for apparel and flat for shelter.

The persistence of these low readings now has analysts speculating that the odds have increased that the Federal Reserve will announce next week a second official round of quantitative easing.

The post Flat core CPI raises odds of more quantitative easing appeared first on Inflation Watch.

“Provincial and municipal governments in areas experiencing rapidly rising property prices may temporarily restrict the number of properties people may buy, in accordance with the situation in their jurisdictions, the State Council said.

The measures also made clear to banks that they would be expected not just to raise mortgage rates and down payment requirements, but to refuse credit to people who are clearly buying homes for speculative purposes.”

Specifically, banks are being asked to increase down payments and mortgage rates for people who already own two homes or more.

Apparently, China has a working definition of an asset bubble and is getting increasingly proactive about preventing (or slowing down) rampant asset inflation.

The post China Gets Even Tougher on Real Estate Inflation appeared first on Inflation Watch.

A total of 3,582 existing single-family homes changed hands in the nine-county region in February, down 8.5 percent from the same time last year, according to the DataQuick report. Their median price was $370,000, a 24.8 percent increase from February 2009.

And then there’s this: “California’s median home sale price jumps 11.2% in February.”

The post S.F. Bay Area year-over-year median home price rises 25% in February appeared first on Inflation Watch.

Here are some highlights from the article that describe the frenetic pace of the current Canadian housing market:

• The average home price rose 23% from the trough in January, 2009, hitting a record according to one broad measure.
• Home-sales volumes are up 70% since January, 2009.
• Housing starts in December reached levels last seen October 2008 (no indication whether these stats were seasonally adjusted).
• “Household debt—largely mortgages—was 1.42 times disposable income during the second quarter of 2009, a record high.”

The response of the Bank of Canada speaks to the trap facing policymakers as they contemplate transitioning monetary away from extremely accomodative levels. The WSJ reports:

“…Canada’s central bankers appear reluctant to take any steps that would hurt the economy. In a Jan. 11 speech, a representative of the Bank of Canada said: ‘If the Bank were to raise interest rates to cool the housing market now…we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession.'”

The Canadians avoided the worst of the recent global meltdown. Let’s hope they did not avoid the fire only to land in the frying pan.

The post Canadian Average Housing Price Sets New Record appeared first on Inflation Watch.

Data through October 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the annual rate of decline of the 10-City and 20-City Composites improved compared to last month’s reading. This marks approximately nine months of improved readings in these statistics, beginning in early 2009.

On a non-adjusted basis housing prices were flat. On a seasonally adjusted basis, which is probably the better measure, home prices increased by 0.4%. Some large post-bubble cities continued to show month-over-month home price increases, even on a non-adjusted basis:

San Francisco has reported seven consecutive months of positive returns, San Diego has reported six and Los Angeles and Phoenix are close behind with five.

In short, the latest Case-Shiller report shows that after a big run-up over the last five months, housing prices are now essentially flat. They are rising a bit in some markets and falling a bit in others, but this report was mostly a yawner, showing neither a big decline nor a big increase in prices nationally.

But that didn’t stop various commentators from trying to put a strong negative spin on the numbers. At Seeking Alpha, Cliff Wachtel saw evidence of a brewing calamity:  “Latest Case-Shiller Housing Report and its Ramifications: Seeds of a 2010 Crisis?”

Wachtel’s Seeking Alpha colleague Markos Kaminis had misgivings too: “S&P Case Shiller’s Home Price Index Concerns Me.”

At the Seattle Post-Intelligencer, Gerry Spratt wrote, “Report: Housing prices up, but for how long?” I wonder if Ms. Spratt was equally skeptical of housing price increases when prices were soaring a few years ago.

The Wall Street Journal’s Real Time Economics ran this re-assuring headline in response to the Case-Shiller report: “Economists React: ‘Prices Have Further to Fall.'”

At Public Radio’s Marketplace, the headline-writer managed to write this headline: “Signs of instability in housing prices.” Um, prices rose 0.0 percent. Instability?!?

When I wrote a post last month arguing that housing prices had bottomed, the response I received from our readers was uniformly negative. Clearly a large swathe of the public (including the Inflation Watch readership) does not think the recovery in housing prices is for real. Since markets often surprise the majority of people, the prevalence of bearish sentiment makes me more bullish about the housing recovery.

The last time I saw sentiment on housing prices running so strongly in one direction was 2004-05, when almost everyone seemed convinced that prices in bubble markets would continue to rise at 10-15 percent per year in perpetuity.

The post Housing bears see signs of calamity in boring Case Shiller report appeared first on Inflation Watch.

Tim Iacono wrote back in 2007: “OER is one of the poorest proxies the world has ever seen as demonstrated by the comparison below with the Case Shiller Home Price Index.”

Source: Tim Iacono

Andrew Jeffrey made a similar point earlier this year:

The statistical alchemists, err, experts, at the Bureau of Labor Statistics use something called “owners equivalent rent,” OER, to measure consumer housing expenses. OER tries to approximate the cost to rent the country’s typical home, and according to the Wall Street Journal makes up 24% of the CPI and 31% of the core CPI, which backs out food and energy costs.

And since even as property values have slid in record-breaking fashion rents remained buoyant, OER has vastly understated the drop in home prices. This means the CPI–were it to reflect some sort of economic reality–would have fallen more than it actually has.

Of course, times change.  Although home prices are still well below their peak, and some observers continue to talk of an ongoing crash in home prices,  the housing market has been on the mend since the spring of 2009–at least if you believe the S&P/Case-Shiller Home Price Index. As was the case in 2007-08, there is a discrepancy between the Case-Shiller index and the owners’ equivalent rent component of CPI, but this time the mismatch causes inflation to be under-reported rather than over-reported.

Let’s look at the numbers. Between April 2009 and August 2009 (the latest month available for the Case-Shiller index), the Case-Shiller index rose from 139.2 to 146.0–an increase of 4.9 percent. By comparison, the owners’ equivalent rent component of the CPI rose from 256.6 to 257.2 during the same period–an increase of just 0.2 percent.  In other words, the rate of home price inflation was nearly 25 times higher than that shown by the CPI.

The CPI as a whole increased from 213.2 to 215.8 — a rise of just 0.1 percent. But if we replace owners’ equivalent rent with the Case Shiller index, CPI would have increased 2.4 percent during this four-month period–an annualized rate of 7 percent.

For simplicity, these calculations are based on seasonally-unadjusted numbers. The results might be slightly different if they were based on seasonally-adjusted figures, but the basic point would not change, i.e.,  reported inflation since April 2009 would be much higher if not for the CPI’s use of owners’ equivalent rent.

Admittedly, the picture is very different if one looks at year-over-year inflation. The Case-Shiller index declined 11.3 percent between August 2008 and August 2009, whereas owners’ equivalent rent increased 1.7 percent. So CPI significantly overstates year-over-year housing inflation. This  overstatement will  gradually get smaller before disappearing entirely in mid-2010, unless housing prices begin to fall again. (Recent reports indicate that housing prices are continuing to rise.)

The post Mismeasuring inflation appeared first on Inflation Watch.