What's the CPI with Housing Factored In?

In 1998, median house prices in San Diego were $207,000. In 2005 they were $604,000. With 20% down, the monthly cost of the $207,000 house was 995 (Principal & Interest), and the monthly cost of the $604,000 house (P&I) was 2902.

(Case-Shiller shows San Diego index in 1998 of 78.23 running to a top of 250.34 in Nov 2005, which is worse than this example.)

Say housing (P&I) is 40% of the average budget and the "rest" of the CPI accounts for 60%.

Let's take a look at a graph using a simple method. We'll take housing price changes each year and weight that and add a 'core' inflation rate. New mortgage payments are directly proportional to housing values and unless a person stays in one house for life, they will see an increase in housing expenses when they move, which can be imputed backwards to the accelerating cost per year.

This of course assumes interest rates, which influence the monthly payment, have an 'average'... which they don't - but interest rates also tend to follow inflation so we'd be wise not to use that as an input to determine inflation.

Here is a graph month by month using the national figures from Case-Shiller to impute the change in monthly payments adding to a 60% weight of trimmed mean CPI. We use the trimmed mean assuming it is a good base case for core inflation which cuts off 8% of the higher and lower values, as those values probably represent restructuring rather than overall inflation. No attempt was made to 'rebalance' the basket of goods or to correct for the 'owner equivalent rent'. This doesn't really 'double count' because we are trying to get the base case and add on a more accurate figure for housing. The result:

Bottom line: on the way up, about 8.5% for 7 years, on the way down (so far) about -5% for 2 years... not only for San Diego, but also for many other areas.

Jim Bradley holds no positions (stocks, bonds, etc) in regards to this article.

Comments

[Donald Ingram:]

First deflation then later inflation. The country will be lucky to escape with just severe inflation. Somehow this is in doubt when considering the amount of continued liquidity being pumped into the economy. Hyperinflation is a distinct possibility now.

Sep 13 02:48 PM