Chart Fun With the S&P Case-Shiller Home Price Index

By popular demand, the collection of charts featuring the S&P Case-Shiller Home Price Index has been updated. First, the home price index versus one of stupidest things that economists have ever dreamed up - the home ownership cost substitute used in the consumer price index, otherwise known as "owners' equivalent rent".

No, it is not being suggested that the HPI be used in place of OER in the inflation statistics because there are other factors that should be included as well - interest rates, property taxes, etc. The chart above simply demonstrates how completely different these two measures are and how disconnected OER and home prices had become.

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As shown below, the absence of real home prices in the Consumer Price Index is a vital ingredient in creating a really big housing bubble. No central banker in their right mind would have short-term rates at one percent, as was the case in the U.S. back in 2003 and 2004, if the inflation rate was at five or six percent.

Of course, when looking at the initial monthly mortgage payments that people were signing up to a few years back, the actual monthly costs were not rising anywhere near as fast as actual home prices. This, in itself, should have been a big red warning light that there was something wrong in the financial system rather than it being accepted as conventional wisdom at the time that a "new era" had begun and we were all getting rich.

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In recent months, the slide in home prices has been overwhelmed by soaring energy prices in the chart above, however, if food and energy are removed from the price index, as economists are wont to do to calculate core inflation, another big red warning light is clear to see in the chart below.

If real home prices are substituted for the almost 30 percent weighted OER component in core inflation, that important inflation statistic would now be minus one percent, and people would be talking about the dreaded "D" word that contemporary economists abhor - "Deflation".

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A recent addition to the known list of fun things you can do with the Case-Shiller Home Price Index is to lay it up against all sorts of other economic statistics. For example, you can put the HPI curve up against job growth as shown below and get the expected results. Housing bubbles are generally good for creating jobs - all the way up to the point when they start deflating.

Yes, breaking out some of the individual labor categories, such as residential construction and retail trade, would be the next logical step here. Maybe next time.

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Good news for the banking industry! Credit cards are making a strong comeback now that home prices are declining and home equity ATMs are being shut down all across the country, largely due to there being little or no equity left to borrow because of that plunging red curve below.

Just last week, Countrywide Financial (NYSE:CFC) sent out over 100,000 letters to homeowners telling them that, due to changing market conditions (i.e., plunging home prices), they could no longer "tap" as much (or, in many cases, any) home equity. Credit card usage, the primary component in revolving debt, is soaring again.

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Speaking of Countrywide, it's kind of surprising to see that year-over-year home prices had to get well into negative territory before the share price of the nation's largest mortgage lender began to plunge.

Then again, the housing price data gets reported about three months after the fact, so, right around the time it became clear that home prices were going down and not up, that's when the going got rough for Angelo Mozilo and company.

Full diclosure: No position in CFC at time of writing.

Comments

[Bad_Writers:]

I love my country but my government scares the hell out of me.

HN

2008 Feb 06 05:40 PM

[kevintx:]

Outstanding article. If 65% of people are owning rather than renting, why not use some perhaps interest/tax adjusted Case-Shiller rather than owners-equivalent rent. The recent Fed cuts make more sense on that basis.

2008 Feb 07 07:15 PM

[Scotfree:]

Great stuff--and frightening. The discussions I usually hear are that inflation is far worse than reported and that food and energy should not be discounted. These charts obliterate those arguments. Why is this scary? Because this suggests that deflation--a far worse scourge than inflation--is a real risk. Greenspan openly worried about deflation, and now Bernanke may silently share his concern.

2008 Feb 08 12:11 PM

[Big Lie::]

So, we are a little bit farther down the road from the Feb 08 comments...now that Fannie Mae and Freddie Mac have been nationalized, making the 11 Billion of preferred stock they sold in Nov 07 worthless, and making their common stock worthless....and with unemployment numbers now at 6% and climbing....I'd like to see the "everything's fine!" commentors above repost their opinions.

This is a global recession, triggered by the good-ol boy cronyism of the Republican administration who refused to regulate their buddies on Wall Street...and are still refusing to regulate the Enron Loophole markets on Oil. Paulson just bailed out China and Japan by guaranteeing their FNM and FRE bonds, while destroying the US pension funds that bought the FNM and FRE preferred stock.

Wake up, people. GW has bankrupted this country, and China and Japan now hold the trump cards to Federal decision making.

Paulson just protected foreign investors over small US investors...just like he protected Wall Street by prohibiting short sales on Wall Street stocks.

This is NOT Capitalism, and it's not Socialism........it is Cronyism.

While China, Australia, Japan, Brazil, India, etc all have laws to protect their citizens from the Global avarice of the greedy few, the USA gives away the value of this country to foreign sovereign funds, and to local billionaires on Wall Street.

Again: This is not Capitalism or Socialism.......it is cronyism. The benefit of the very few at the expense of the very many.

Wake up.

2008 Sep 09 04:39 PM

[Root Cause:]

Big Lie is correct that bad behavior occurred on wall street, however, this behavior is not the root cause of this crisis. The root cause rests heavily at the feet of congress who made laws requiring banks to loan money for housing to people who could not afford the mortgages. Given this catalyst all manner of bad behavior ensued. The tragedy is that congress believes they can now fix what they broke with more of the same.

Feb 24 10:38 AM

[ROBERT HERN...:]

BULL!!!, LET ALL THE FINANCIAL INSTITUTIONS FAIL

LET's GET ALL US BACK TO WORK MAKING SOMETHING OF VALUE.

Re: SOLVING THE US ECONOMIC PROBLEM IN 2009

Make a partnership with the Small Businesses of America. Your opportunity to become a HERO!!


Please give serious consideration to my recommendation to solve the unemployment problem.

I am recommending an Employment Program that will create 4 million jobs in 2009. Because the majority of jobs are created by small businesses and small businesses can not afford to hire an employee, the government should partner with small business to create jobs. The government’s responsibility is to support the American tax payer not the irresponsible large bankers and hedge funds.

The Employment Program is based on a business paying one half of the new employee’s salary, benefits and the federal Government paying one half of the new employee’s salary up to a maximum of $22,500 per year.

This partnership is depended on the small business committing to hire a new employee or rehiring a laid off worker. The recommended program obligates the Federal Government to a maximum of $22,500. per job created per year. The Federal Government support of $22,500 per year for 4 million workers will cost 90 billion dollars per year. The government should commit this support to small businesses for two and a half years. Just think how fast this will create jobs and on the job training. This program can use existing employment procedures, regulations, IRS forms and procedures. A win/win situation for all. You can become a Hero!!

Example 1. Employer pays $11,000.
FED pays $11,000.
TOTAL wage & benefits $22,000.

Example 2. Employer pays $22,500.
FED pays $22,500. max
TOTAL wage & benefits $45,000.

Example 3. Employer pays $35,000.
FED pays $22,500. max
TOTAL wage & benefits $57,500.

Creating employment is the only program that will help the US recover from the current economic problem.
Again, Small Businesses produce the majority of jobs in the US. Support Small Businesses in creating jobs and solve the economic problem in 2009.

Please give serious consideration to my recommendation to solve the unemployment problem.
To ensure 4 million jobs are created in 2009, this program should be implemented.

1. Guarantee to US Small Business: if they hire a new employee, the Federal Government will pay one half of the new employee salary and benefit for two and one half years, maximum of $22,500 per year from the government. The business will pay one half, government will pay one half.

2. A maximum of $22,500 per year per employee from the government will cost 90 million per year; this will support 4 million new jobs.

3. This will encourage small businesses to hire, which will keep households together, keep children in school and support the economy of the neighborhood they live in.

4. A small business with four or less employees can hire one new employee.

5. A small business with five to 15 employees per location can hire two new employees.

6. A business with 16 to 50 employees per location can hire five new employees.

7. A business with 50 plus employees per location can hire a maximum of seven new employees.

8. The business will hire from the existing unemployment list.

9. This program will support an employee with an annual salary of $45,000. and more.

10. This will work with existing IRS and employment rules. Monies will be sent to the employer, not the employee.

Your opportunity to become a HERO!!


If you have questions please call:



Robert Hernandez
1444 TRUNE WAY, VENICE, FL. 34292
[phone], [phone]

Apr 02 11:52 PM