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Why the government took home prices out of its main inflation index

fullstackeconomics.com

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Re: Why the government took home prices out of its main inflation index

#71

Post by pmyteh »

sokoloff wrote: post #6

> Counting both the home purchase price and mortgage payments was double counting. That seems so blindingly obvious a flaw in the old methodology that I’m surprised that was ever implemented in the first place.

Often the first implementation is almost an MVP (we have no data on this, let's get some!) and once it's in place it has some inertia.

Think of the Dow Jones Industrial Average. Nobody would construct a price-weighted index today: it has some really poor properties that are avoided by weighting by market capitalisation instead. But the Dow sails on.

Re: Why the government took home prices out of its main inflation index

#72

Post by hammock »

binarybits wrote: post #27
hammock wrote: post #15

Earlier quoted context omitted.

Shadowstats.com has been tracking inflation with old methods for a long time

OP author here. I wrote a shadowstats debunker back in November: https://fullstackeconomics.com/no-the-real-inflation-rate-is... tldr: they don't actually reconstruct the old methodology. They add a fudge factor based on how much they think the new methodology increases the inflation rate. And that estimate is based on a basic math error.

Thanks for writing that up. It was always pretty clear the Shadowstats methodology was the simple application of some constant factor, and Shadowstats was more an instrument to talk about how the government measures inflation (and changes its own methodology) than anything else.

Re: Why the government took home prices out of its main inflation index

#73

Post by chii »

leoedin wrote: post #44
dragonwriter wrote: post #32

Earlier quoted context omitted.

> the really psychotic aspect of this all is that in the long run it will destroy the economy as family formation craters Starting a family doesn't require owning a home. Vast numbers of people start families without ever owning a home.

The point isn't that you can't start a family without owning a home (obviously that's untrue) but that many people won't want to start a family while living in the relative instability of rented accommodation. That's almost certainly true - I definitely had buying a home as a pre-requisite to starting a family (and I don't regret that decision). There's always going to be some babies, but it's the societal level fert…

> won't want to start a family while living in the relative instability of rented accommodation

it should be alleviated by making rental accommodation more stable - such as a longer term contract. What if you had a 30 year contract rental (with built-in, but known ahead of time increases).

Re: Why the government took home prices out of its main inflation index

#74

Post by hattmall »

mschuster91 wrote: post #35
recursivedoubts wrote: post #20

https://www.longtermtrends.net/home-price-median-annual-inco... nb that there is little relation to interest rates, which have been steadily declining since 82: https://www.freddiemac.com/pmms with the recent spike, we are currently at ~2000 interest rates, when homes were at 4x incomes, rather than 7+x home prices have been absolutely bonkers, with two massive bubbles (we are in one right now) and the fact that this…

> home prices have been absolutely bonkers, with two massive bubbles (we are in one right now) Isn't the definition of a bubble that it has the capability to pop and then eventually pops? At least for urban housing, I see no way of that even being remotely possible, neither for the US nor here in Europe. Rural areas simply are too far left behind to support decent human life - no high speed Internet, no public transp…

Is this actually happening in Europe? The US is the exact opposite. It's rather trivial to improve rural areas and housing costs are outpacing urban areas at least in percentage increases. Most rural areas still have access to all the basics that urban areas provide and are only a couple hours drive from major urban centers. There's no public transport but no one cares about that in the US. Even in the largest cities it is generally lacking. Highspeed internet is widely available with even more being deployed currently. Pretty much everyone is getting fiber in the next 3 years and 5g is already in most areas. Only the extreme rural areas lack connectivity and then there is starlink.

Re: Why the government took home prices out of its main inflation index

#75

Post by djoldman »

The complexity is this:

> Suppose you buy a home for $500,000, financing the purchase with a mortgage at a 6.4 percent interest rate. A few years later, you sell for $600,000. Interest rates have fallen, and the new buyer is able to get a mortgage at 4.7 percent.

> The price of the home has risen by 20 percent, so you could just say the cost of housing has gone up 20 percent. But that would be misleading. Assuming a 20 percent down payment, your original mortgage would have cost $2,502 per month, while the new owner’s mortgage would cost $2,489 per month. The monthly mortgage payment required to own the home actually went down.

Re: Why the government took home prices out of its main inflation index

#76

Post by jjslocum3 »

Mortgage loan officers (and also car salesmen) do all in their power to redirect people away from the fact that they're going to fork over e.g. $600k in total interest and principle for a $300k sticker-price house over 30 years. They do this by focusing on the monthly payment rather than the actual total spend. Convincing buyers that monthly out-of-pocket spend is somehow a proxy for the actual purchase price is a powerful tool that, while not technically deceptive (you do, after all, have to sign a Truth-in-Lending statement when you finance a house), absolutely causes people to spend more than they otherwise would.

But since the total lifetime spend on a house is absolutely lower if the interest rate over the life of the loan is lower, then it's true that lower interest rates make homes cheaper over their lifetimes. I don't understand why the writer of this article would chose to focus on the deceptive monthly payment argument rather than the concrete interest-rate argument.

Re: Why the government took home prices out of its main inflation index

#78

Post by ClumsyPilot »

book_mike wrote: post #60

Ignoring what the value of a currency may be I wish buyers would reject bad prices. I really care about what the actual cost of a thing is from dirt to package. The companies that market, make and deliver products should make a profit but I'm not buying their Ferrari. Capitalism start with "No deal, not at that price."

Problem is the amount of money people will pay for a place to live is unlimited.

If people would take 300 year mortgages that would put your kids into debt bondade if thry could

Re: Why the government took home prices out of its main inflation index

#79

Post by [deleted] »

dont__panic wrote: post #58
mschuster91 wrote: post #35

Earlier quoted context omitted.

> home prices have been absolutely bonkers, with two massive bubbles (we are in one right now) Isn't the definition of a bubble that it has the capability to pop and then eventually pops? At least for urban housing, I see no way of that even being remotely possible, neither for the US nor here in Europe. Rural areas simply are too far left behind to support decent human life - no high speed Internet, no public transp…

Interestingly I wonder the exact opposite -- can urban housing really justify these insane valuations when US cities have next to no appeal to me? I recently moved out of a major city to a small, walkable town so I can get away from the crime, traffic, noise, dirtiness, and car-domination of US cities. It's pretty remarkable to see people and children walk around my neighborhood now -- didn't have that in my major US…

[deleted]

Re: Why the government took home prices out of its main inflation index

#80

Post by JohnJamesRambo »

djoldman wrote: post #75

The complexity is this: > Suppose you buy a home for $500,000, financing the purchase with a mortgage at a 6.4 percent interest rate. A few years later, you sell for $600,000. Interest rates have fallen, and the new buyer is able to get a mortgage at 4.7 percent. > The price of the home has risen by 20 percent, so you could just say the cost of housing has gone up 20 percent. But that would be misleading. Assuming a…

But someone made $100k in a sale a few years later…
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