Housing Starts Down, Consumer Prices Up

At some point in time, you'd think that the current trends of falling real estate sales and rising consumer prices would stop and then reverse. Surely that will happen someday, but given how long the opposite was true - rising real estate sales along with falling consumer prices - that may be some time from now.

A short time ago, the Commerce Department reported(.pdf) that, during the month of March, housing starts and permits for new construction plunged to their lowest level in 17 years.

Housing starts fell 11.9 percent for the month and 36.5 percent on a year-over-year basis while permits for new construction, a leading indicator for future homebuilding activity, dropped 5.8 percent from February to March and 40.9 percent from year-ago levels.

The situation continues to get worse for homebuilders - look for even more job losses in this sector in the upcoming labor report in two weeks.

In order to keep their statistics from looking too bad, the Commerce Department should really think about implementing something imaginary to replace real world data like the Bureau of Labor Statistics did some 25 years ago when they replaced the real cost of homeownership with "owners' equivalent rent" in the consumer price index.

As long as owners' equivalent rent and home rental costs account for 30 percent of consumer prices, it is nearly impossible to generate a really big inflation number since both of these costs will likely remain in the two to three percent range as long as there's a housing boom or a housing bust.

As shown in the chart to the right, more than anything else, it was the shelter component that put inflation at almost 14 percent back in the early 1980s (see Stagflation, then and now for more on this subject).

This worked spectacularly when the housing bubble was inflating - more buyers and fewer renters resulted in less demand for rental units and kept rental costs from rising. Now that the housing bubble has burst, a glut of "investment properties" are available for rent - fewer buyers and more renters but much greater supply keep rental costs from rising again.

Think about it Commerce Department ... what follows is the kind of mild report you could be producing if you "worked on the data" a little bit.

The BLS (Bureau of Labor Statistics) reported that, after no change in February, consumer prices rose 0.3 percent in March, up 4.0 percent from year-ago levels.

Energy prices once again rose sharply, heating oil surging 7.9 percent in March and now up 40.2 percent on a year-over-year basis. Gasoline prices rose rose 1.3 percent for the month and 26 percent from last year at this time.

Overall energy costs rose 1.9 percent last month and 17.0 percent from a year ago.

There was good news for fashion bugs as clothing prices fell 1.3 percent in March and are now down 1.4 percent over the past year. The cost of women's and girl's apparel fell 2.6 percent last month and is now down 5.4 percent from year-ago levels.

Food costs continue to rise, however, as the price of bread rose 14.7 percent over the past year and milk prices are up 13.3 percent during that same period.

For those consumers who spend an inordinate amount of their income on clothing and accessories and next to nothing on food and gasoline, it is a veritable dreamworld of lower consumer prices.

For the other 99.5 percent of the population, higher prices hurt.

Comments

[User 143167]

Even with the shitty CPI model used by the BLS, the CPI will very likely go up very quickly in the third quarter of this year due to the seasonal adjustment effects if the crude oil price keeps hovering over $110 a barrel.
Another leading indicator to the CPI is the import price index which also went straight up in the recent months. This bodes ill for the inflation control too.

[kingofithaki]

inflation is not the problem so much as the disruption of the comparatives chain...how many hours of work does it take to get the goodies you want...when the cost of time..and that is all a wage is really, just some time dollars...I give you my human capital, you give me fiat certificates from the fed and I use them to get stuff I want...inflation as an issue is a joke...further, debt is not an issue except in term of the cost to service the debt...that the fed deficit(I like to call it capital market investment infusion) works out to maybe 50k per person with a cost 2 service of about 1,500/yr...about 125/mth...inflation hurts those who don't understand it exists and expect to have investment give you a return by being static...how many hours of work equals what return on my human capital invested...the real issue is the disconnect between the hours available to work and the fed certificates we are given and what we end up buying with it...oil could drop to $ 18/barrel in less than 36 mths...and all this will then be a waste of energy...till then people will make adjustments and life will go on...most stats are useless..why do we take samplings of items when barcodes give us real time information...the real estate numbers are samplings...why...we have real time numbers available..in the old days, when accounting was done by hand, and auditing was a big mess, sampling was needed..in our computerized world, why do we continue to take surveys and samplings...we have real time data, let's start using it

[Ames Tiedeman]

The good news is with housing starts down supply will begin to be bought up. By 2010-2011, we will see some growth here again.

[Robert Trudeau]

The questions isn't high inflation, we can all agree on that. The question is how high inflation will go, and what will the Fed need to do to bring it back under control. Presently, the Fed can not combat inflation without causing further dramatic deflation in the housing market and a severe recession. It can only fight one fire at a time. I'm afraid we are going to be paying for this housing crisis for years to come.

[Robert Trudeau]

Ames, here in Phoenix housing starts were on the periphery, where no one but investors wanted to buy. In these developments, every other house is for sale, and many sit empty. Until infrastructure is in place they will remain undesirable. Overall, supply won't come down until prices come down, and people believe they won't fall further. In fact, overall supply will likely go up over the next couple of years as more homes go into foreclosure, even with no further building.