The Consumer Price Index is out today and is reported to show prices down 1.3% yr on yr, the largest drop since 1950. However, this index understates the drop in prices. Here is a link to the Bureau of Labor Statistics description of how it estimates housing costs in the CPI: http://www.bls.gov/cpi/cpifacnewrent.pdf.
This total is 30.4% of all costs. There is one fundamental flaw, which is conceptual. 24.4% of the entire CPI is supposedly from what a homeowner would pay to rent the home he/she lives in. The problem is that this cost is theoretical, imaginary and unvalidatable. What is validatable is what the house is worth as an asset, what the mortgage would be on the house, what the taxes and other expenses of maintaining the home are, etc.: in other words, what the cost of OWNING is. The idea that an owner would in effect rent to himself and that that guesstimated cost is part of the cost of living is strange.
The practical problem stemming from this technique is that the owner is asked what his house is worth as a rental unit. Well, most people are going to overestimate the value, and in truth most people who own their own home live in communities without well-developed home rental markets, and often the rental homes are not as well-maintained as the owned homes, so who knows what the rent would be? Further, if all owners rented their homes out, there would be more supply, and rents would then drop.
The beancounters at BLS insist that rents are rising and that "owner-equivalent rent" (that 24.4% of the CPI) has risen over the past year and rose last month.
In other words, the CPI probably understated housing inflation somewhat during the housing boom, but because of the technique of owner-equivalent rent, most homeowners were probably generous in their estimate of OER increases. However, most homeowners are loathe to acknowledge that their home is declining in price, and so they are understating the OER decline. Numerous studies show that people will agree that the housing market is in a decline locally, but believe that their individual house price is resisting that tide. That's human nature, apparently.
Thus, 24.4% of the CPI is, most importantly, an inappropriate measure of inflation, but we can't change that.
What we can do is realize that within the confines of using owner's-equivalent rent as a measure of price changes to live in a home, there is likely a systematic bias for the CPI to keep up with price increases in a housing boom but to lag price decreases in a housing bust.
Copyright (C) Long Lake LLC 2009
Showing posts with label owner's equivalent rent. Show all posts
Showing posts with label owner's equivalent rent. Show all posts
Wednesday, June 17, 2009
Wednesday, March 18, 2009
Lies, Damned Lies, and Government Statistics
Once in a while, Government statistics, which are now deliberately presented to prevent people from easily even seeing year-on-year comparisons in favor of almost meaningless month-to-month variations, end up hiding not the bad news but the good news.
Today, for example, the consumer price index was released. Allegedly, clothing and automobile costs led the price increase.
Anyone who believes that automobile prices went up last month is living in another planet. The same is true for clothing prices.
For example, all-cotton Dockers pants are on sale at Macy's for $33, down from $48, but in a post-St. Patrick's day, pre-Passover sale, they are being further discounted to $28. This price has to be a price seen many years ago. In addition, there may actually be some quality improvement, such as permanent crease and something called "micro-sanding for softness". Plus, in tune with the obesity epidemic:
"Your favorite khakis now have an invisible extra inch in the waistband that expands when you need it."
Unfortunately, the Fed keeps insisting that even modest deflation, such as a 1-2% price decline over the next year or two, is so horrible that it needs to continue its hysterical, hyperkinetic activities. Earth to Fed: get on the side of the people rather than the banksters, for a change. Raises are hard to come by. Secure financial assets yield nothing, or next to nothing. Formerly reliable dividend stocks such as GE and BofA have slashed their dividends, and everyone knows that absent the bailout, BofA might well be bankrupt, as might GE Capital. So, the Fed needs to cut the ---- about deflation expectations suddenly becoming ingrained. The truth is that inflation expectations have risen along with the massive Federal deficits and Federal Reserve actions.
Back to railing against Gov't statistics.
They even mislead us about Gross Domestic Product.
The government, for unclear reasons, assumes that even though a home is correctly counted as economic activity when it is built, a homeowner pays him/her-self rent monthly and thus contributes to GDP. This is under the theory that because rents are part of GDP, it is unfair that a house or condo, sitting innocently wherever it sits, cannot be treated like a washing machine or television that gets used regularly but does not add to measured GDP except when it is produced and sold. This "owner's equivalent rent" adds a good deal to announced GDP. Why this logic is not applied to automobiles, which also add to GDP when rented, is not clear. As with the steroids epidemic that keeps the sports records coming, owner's-equivalent rent is economic statistics on steroids- pumped up to keep the public happy.
In any case, the point here is to ignore what the Government tells you about the economy where your eyes and eyes can provide better information, and to be skeptical about all the headlines where you cannot comment (such as trade deficits).
The Establishment/Fed/Feds pound the public through every way possible with the message that the Great Depression was deflationary, and thus the only solution for any economic problem is inflation. This flies in the face of all common sense. If farmers figure out a way to safely double the yield of a crop at the same cost per acre, then they can lower the price, sell more of that crop, and make more money. That's called "good" deflation. If the crop fails, that's bad no matter what happens to the price.
What is going on now in the economy is that there are not enough savings anymore in the U. S. This is analogous to the rural family that in past years saved grain and salted meat to get through the winter, but the rats got into the grain and the meat spoiled anyway. Thus there is currently little buffer for the hard times that have arrived. Now that this year's economic crop is failing, the fact as of today is that prices of almost all freely tradeable goods, absent the governmentally-approved cartel called OPEC, are falling. This is "bad" deflation, as it comes from crisis, but it is, nonetheless, deflation.
In addition, if and when production increases, prices may fall further for a while, as costs per unit of production drop as the increased production is spread over more units with low marginal cost per extra widget produced.
From an investing standpoint, the problem with the current deflation is that there are few to no clearly attractive financial asset classes in which to invest. This is the polar opposite of the situation in the early 1980's, when almost all financial assets, from cash to bonds to stocks appeared attractive.
Re stocks, this blog was started in December 2008 with the Dow around 8500. From the start, the advice was that the stock market was suited only for gamblers. The Dow is now around 7300. The advice remains unchanged. The best investments in companies may be in private entities that have not gone public at inflated cash-out prices.
Capital preservation remains the watchword around these parts.
Copyright (C) Long Lake LLC 2009
Today, for example, the consumer price index was released. Allegedly, clothing and automobile costs led the price increase.
Anyone who believes that automobile prices went up last month is living in another planet. The same is true for clothing prices.
For example, all-cotton Dockers pants are on sale at Macy's for $33, down from $48, but in a post-St. Patrick's day, pre-Passover sale, they are being further discounted to $28. This price has to be a price seen many years ago. In addition, there may actually be some quality improvement, such as permanent crease and something called "micro-sanding for softness". Plus, in tune with the obesity epidemic:
"Your favorite khakis now have an invisible extra inch in the waistband that expands when you need it."
Unfortunately, the Fed keeps insisting that even modest deflation, such as a 1-2% price decline over the next year or two, is so horrible that it needs to continue its hysterical, hyperkinetic activities. Earth to Fed: get on the side of the people rather than the banksters, for a change. Raises are hard to come by. Secure financial assets yield nothing, or next to nothing. Formerly reliable dividend stocks such as GE and BofA have slashed their dividends, and everyone knows that absent the bailout, BofA might well be bankrupt, as might GE Capital. So, the Fed needs to cut the ---- about deflation expectations suddenly becoming ingrained. The truth is that inflation expectations have risen along with the massive Federal deficits and Federal Reserve actions.
Back to railing against Gov't statistics.
They even mislead us about Gross Domestic Product.
The government, for unclear reasons, assumes that even though a home is correctly counted as economic activity when it is built, a homeowner pays him/her-self rent monthly and thus contributes to GDP. This is under the theory that because rents are part of GDP, it is unfair that a house or condo, sitting innocently wherever it sits, cannot be treated like a washing machine or television that gets used regularly but does not add to measured GDP except when it is produced and sold. This "owner's equivalent rent" adds a good deal to announced GDP. Why this logic is not applied to automobiles, which also add to GDP when rented, is not clear. As with the steroids epidemic that keeps the sports records coming, owner's-equivalent rent is economic statistics on steroids- pumped up to keep the public happy.
In any case, the point here is to ignore what the Government tells you about the economy where your eyes and eyes can provide better information, and to be skeptical about all the headlines where you cannot comment (such as trade deficits).
The Establishment/Fed/Feds pound the public through every way possible with the message that the Great Depression was deflationary, and thus the only solution for any economic problem is inflation. This flies in the face of all common sense. If farmers figure out a way to safely double the yield of a crop at the same cost per acre, then they can lower the price, sell more of that crop, and make more money. That's called "good" deflation. If the crop fails, that's bad no matter what happens to the price.
What is going on now in the economy is that there are not enough savings anymore in the U. S. This is analogous to the rural family that in past years saved grain and salted meat to get through the winter, but the rats got into the grain and the meat spoiled anyway. Thus there is currently little buffer for the hard times that have arrived. Now that this year's economic crop is failing, the fact as of today is that prices of almost all freely tradeable goods, absent the governmentally-approved cartel called OPEC, are falling. This is "bad" deflation, as it comes from crisis, but it is, nonetheless, deflation.
In addition, if and when production increases, prices may fall further for a while, as costs per unit of production drop as the increased production is spread over more units with low marginal cost per extra widget produced.
From an investing standpoint, the problem with the current deflation is that there are few to no clearly attractive financial asset classes in which to invest. This is the polar opposite of the situation in the early 1980's, when almost all financial assets, from cash to bonds to stocks appeared attractive.
Re stocks, this blog was started in December 2008 with the Dow around 8500. From the start, the advice was that the stock market was suited only for gamblers. The Dow is now around 7300. The advice remains unchanged. The best investments in companies may be in private entities that have not gone public at inflated cash-out prices.
Capital preservation remains the watchword around these parts.
Copyright (C) Long Lake LLC 2009
Subscribe to:
Posts (Atom)