THE "GLOOM AND DOOMERS" FIND COMPANY

Kitco ^ | September 28, 2005 | Dr. Richard S. Appel

[porkchops 4 mahound]

Obvious?

[hubbubhubbub]

In your mind I guess

[ozzymandus]

DOOMED, I tells ya!-Dr. Homer Simpson

[porkchops 4 mahound]

Some folks, (unlike you who is all knowing, well all knowing about everything but "the point"), might NOT know who KitCo is.

[Mase]

Core CPI doesn't include food, energy or home ownership.

You may want to go to the BLS website and look up Owner's Equivalent Rent. The Bureau of Labor Statistics, calculates a data series called Owners' Equivalent Rent, which measures the implicit financial value of home ownership. The rising cost of home ownership is absolutely included in the CPI.

Through July of this year the core CPI was 2.1%. The CPI, including food and energy, was 3.2%. During the 19-year bull market that began in 1982, the average annual CPI change was 3.3%.

Business Week

With the 10-year bond yielding 4.3%, this all sounds reasonable, unless of course, you are someone who thinks they know more than the bond market and all the others who buy our debt instruments.

They rely successfully on widespread economics illiteracy among the U.S. population.

I guess you do know more than the markets. You must be a very wealthy individual.

[AdamSelene235]

You may want to go to the BLS website and look up Owner's Equivalent Rent. The Bureau of Labor Statistics, calculates a data series called Owners' Equivalent Rent, which measures the implicit financial value of home ownership. The rising cost of home ownership is absolutely included in the CPI.

Since rents are not in line with house prices, this understates housing inflation.

The Federal Reserve commissioned a 52-page study on the subject. In it, they discussed the impact of housing demand on the OER component of the consumer price index. They found:

"Downward pressure on rental prices mainly resulted from an increase in demand for homeownership, which was spurred by historically low mortgage interest rates (see Figure 19). As housing starts and home sales surged in the recent recession and recovery, the national rental vacancy rate jumped from 7.8 percent in the fourth quarter of 2000 to 10.2 percent in the fourth quarter of 2003. This effect was compounded by the way owner-occupied housing prices are measured in the CPI. The CPI uses a rental-equivalence approach, measuring the value of the shelter services an owner receives from his or her home. Price movements in owners' equivalent rent reflect changes in prices of rental units that are comparable in characteristics to owner-occupied homes. Therefore, increased demand for homeownership put downward pressure not only on tenants' rent but also on owners' equivalent rent -- the largest component in the CPI."

I guess you do know more than the markets. You must be a very wealthy individual.

Don't you have any other lines?

[Toddsterpatriot]

Since rents are not in line with house prices, this understates housing inflation.

So, how do you think housing inflation should be calculated? Show it somehow be based on monthly mortgage payment? Using whatever method you think it correct, what is the true inflation rate?

[Toddsterpatriot]

*Show* Should it somehow

[Mase]

Since rents are not in line with house prices, this understates housing inflation.

Home real estate is subjective to value. Establishing a fair value for housing for the purpose of calculating the CPI is difficult at best. However, hubbubhubbub said that CPI calculations don't include home ownership. Is this a statement you wish to defend?

The old method of calculating housing inflation used the actual increase in home prices. How many people would be affected by this methodology given that, what, less than 10% (?), of Americans buy a new home every year? The old method was notoriously inaccurate. The new method still overstates the impact of rising home values on the US population.

If I bought my home 5 years ago for $250,000 and it's now worth $500,000 what is the inflationary impact of this appreciation on my family? My mortgage is still the same. The only expenses that increase are my property taxes and insurance. This is the case for the vast majority of homeowners every year.

If equivalent rent went up 50% while my home doubled in value, over that five-year period, rents would not be in line with house prices but the rate of inflation would still be overstated.

I agree with Alan Reynolds (Illusory Inflation) that the way in which we calculate CPI overstates the rate of inflation. The bond market seems to agree as well.

Don't you have any other lines?

What, you don't agree with me that anyone who knows more (or better) than the markets ought to be very wealthy? You're right though, I do ask the question often but I never seem to get an answer.

[AdamSelene235]

So, how do you think housing inflation should be calculated? Show it somehow be based on monthly mortgage payment? Using whatever method you think it correct, what is the true inflation rate?

I don't believe there should be a politburo attempting to centrally manage and manipulate the economy.

As far as inflation, M3 has been averaging 8% per year for the last decade.

[AdamSelene235]

If I bought my home 5 years ago for $250,000 and it's now worth $500,000 what is the inflationary impact of this appreciation on my family?

In many cases it alters the family's spending habits as they extract equity from their homes.

I agree with Alan Reynolds

I'm a supporter of CATO, but this one issue we don't see eye to eye on. I've even briefly argued the subject with William Niskanen.

Its a Chicago vs. Austrian thing. Only time will tell (of course both camps will simply have different interpretations)

[Sicon]

This stern warning was for the United States to limit its dangerous monetary expansion, increase its taxes, and force its consumers to reign in their wonton spending.

Hmmm. Why is it that DECREASING GOVERNMENT SPENDING is never considered a possible remedy? Sure, raise taxes some more! That'll stop all the peons out there from engaging in "wonton spending."

[Sicon]

They will be preparing the world for a potential economic melt-down that was created by our nation's prolonged, egregious, deficit spending campaign, and the creation of the enormous amount of dollar credits that they fostered

Allow me to translate: it's all OUR (or Bush's) fault!

[Toddsterpatriot]

I don't believe there should be a politburo attempting to centrally manage and manipulate the economy.

I guess each state should manage the money supply? Maybe each person?

As far as inflation, M3 has been averaging 8% per year for the last decade.

Great, so that translates into an inflation rate of what?

[AdamSelene235]

I guess each state should manage the money supply?

Noooo.

Maybe each person?

Yes, let the free market pick the medium of exchange.

As far as inflation, M3 has been averaging 8% per year for the last decade. Great, so that translates into an inflation rate of what?

Bout 8%.

[nopardons]

DONNER PARTY CONSERVATIVE, are you, dear?

[nopardons]

Yes, you should have !

[Toddsterpatriot]

You have the mathematical formula for that answer? Or are you just saying that we've had zero GDP growth for the last decade?

[expat_panama]

"So, how do you think housing inflation should be calculated?"

My answer:  "very carefully."  We could start with considering the size of the house when looking at the prices-- in 1950 median home size was 900 square feet -- in 2000 it was 2100.

I did a rough comparison of real square foot home costs to real wages and found from 1980 to 2000 that wages grew slightly better. 

What makes it more interesting is quality-- modern homes now include central air conditioning, garages replacing carports, safer electrical work etc (more info here).

Bottom line ---being a doom'n'gloomer in this age has got to take more and more effort.

[Mase]

In many cases it alters the family's spending habits as they extract equity from their homes.

Do you subscribe to the belief that Americans are addicted to debt and don't save? I hope not because it's all myth. Just look at the most recent Fed figures on household net worth - $50 trillion - with only about 20% of that attributable to homeowner equity. The average American household has about 57% equity in their home. Americans' total debts, including mortgages, are dwarfed by their liquid assets. Household net worth is double what it was just 10 years ago.

In 2004, our credit card debt rose by just 4% while we increased our financial assets by $590 billion. What's truly remarkable is that our per capita liquidity exceeds that of Japan - a country known for it's high savings rate.

The Commerce department doesn't count capital gains when they tally the national savings rate. Since 1997, American's have cashed in a total of $3.5 trillion in capital gains which is more than the combined total of the past 20 years.

Isn't it hard to be a doom and gloomer in light of all this good news?

Its a Chicago vs. Austrian thing.

??