CAMS Weekly View from the Corner – Week ending 3/26/21
March 29, 2021
We offer a contemplative question: If asked about housing costs what first comes to mind as a barometer for measuring such costs?
Our contemplation on the question quickly exposed the realization that it depends on a person’s housing situation. Are they an existing homeowner that is content with their current residence or are they looking to purchase a different home.
Going further, are they currently renting and expect to be renting moving forward. If currently renting are they actively looking for a home to purchase or expect to be doing so in the near future.
There are additional scenarios but the point is made in the sense of answering the question depends on the proverbial seat you are setting in.
Taking our individual perspectives off the table and entering a thought experiment for the nation as a whole: When thinking in such a large macro view would it seem correct when measuring housing costs that the rate of increase of prices for existing and new homes sold would certainly be a notable if not a primary benchmark to gauge the pricing story for housing costs?
They are not.
The well recognized Consumer Price Index (CPI) includes two different measures of housing costs by what is known as Owner’s Equivalent Rent and Rent of Primary Residence. Both essentially cover the rent aspect of housing costs but do not address the price increases of actual homes being sold.
As we all know housing costs play a notable role in most budgets. The CPI also places an emphasis on housing as the two mentioned metrics take up just over 30% of the CPI. With such a component weighting this tells us that Owner’s Equivalent Rent and Rent of Primary Residence play a significant role in the CPI results.
But what if those measures are registering anemic growth rates while actual home prices are rocketing higher?
This is our current experience which also rang true back in the mid 2000’s which led to a massive housing bubble and ultimately the collapse of the economy and stock market, i.e. The Great Recession as it was labeled.
Click For Larger View: https://fred.stlouisfed.org/graph/?g=CcI0
Click For Larger View: https://fred.stlouisfed.org/graph/?g=CpPV
The two charts above depict the previous five years of year-over-year growth in the costs of housing. On a trend basis, in the past year, we can see how they have been moving in opposite directions.
The first chart depicts the CPI’s highly weighted housing cost measure known as Owner’s Equivalent Rent. Since early 2020 housing rental growth rates have been trending downward. They are now reflecting 2% year-over-year growth rates.
The second chart depicts the S&P/Case-Shiller 20 City Composite Home Price Index. As depicted, this has been rocketing higher since early 2020 and now stands at 10% year-over-year growth rates – 5 times the increased cost growth rate of the CPI’s housing measure.
This offers that housing components of the CPI are not registering the actual housing cost story-line in the U.S. and through this also offers that CPI as a whole is not reflecting the overall price inflation accurately. This matters.
The Federal Reserve
The Federal Reserve (FED) has been on record stating they desire and are comfortable with an inflation rate moderately above 2%. The most recent overall CPI registered 1.7%.
They are also on record stating they do not expect to increase their short term benchmark interest rate (Federal Funds Rate) until perhaps 2023 in light of the subdued inflation backdrop to aid in supporting the overall economy.
History rarely repeats but it often rhymes
Coming out of the early 2000’s recession the FED was similar in its tone – think low inflation and no expectation of rate increases in order to support the economy. This led to a very easy interest rate policy approach even while housing market prices were rocketing higher quarter-after-quarter well into the mid 2000’s.
Just like now, back then, the official inflation measures were not capturing the rampant housing price increases because they did not include home price sales. They included Owner’s Equivalent Rent.
Back in the 2003 – 2006 time-frame home price sales were reflecting 10-17% increase in prices paid while the Owner’s Equivalent Rent registered 2-4% increases.
Current day, from early 2020 home prices paid have increased from a 4% level up to now 10%. Simultaneously, Owner’s Equivalent Rent has decreased from 3% down to 2%. A tremendous difference in trends and absolute price increases when comparing the two.
In recent Weekly View’s we have offered the tremendous price inflation taking place in various metals, food commodities, energy and now actual housing price inflation. That is a broad swath of the overall economic structure.
Per the FED they have no intention to raise interest rates for years. Prices are rising rapidly all around within the economic system. We continue to ask the observatory question: How is the bond market going to handle this?
If they continue to sell off bonds in response the stock market, or at minimum areas within the stock market, may struggle. We are watching all of these dynamics closely and will continue to share accordingly.
I wish you well…
Director, Market Research & Portfolio Analysis
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