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

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

#201

Post by sokoloff »

throwaway_1928 wrote: post #190
randomdata wrote: post #150

Earlier quoted context omitted.

I would say the easiest way to explain it is, as implied by the "C", that CPI is intended to track consumption. Houses aren't normally consumed. Your house a decade from now is expected to be, more or less, the same house you purchased originally. You expect, more or less, to be able to sell it for at least as much as you paid for it originally. Whereas a consumable good, like food, is used up once you eat it and the…

> Houses aren't normally consumed. That is just a technicality. Housing is the greatest one time and recurring expense most people have and change in prices for housing has the greatest impact on their perception of how expensive things are.

The monthly/annual use of a space to shelter is the service that is being consumed. The perpetual right of ownership of that space to shelter is not being consumed.

I don't think the CPI is meant to capture people's perception of how expensive things are. If their perception differs from the reality of what they're consuming, it's more important for CPI to track the consumption than the perception.

"The CPI is wrong because it doesn't match people's perception" doesn't make much sense to me.

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

#202

Post by mtoner23 »

faangiq wrote: post #68
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…

This was all part of the plan to build a nation of mindless debt slaves. It was very effective.

the 30 year mortgage was one of the greatest financial innovations of our time. Allowing anyone to pay off 2022 costs in 2052 dollars. I understanding hating credit card debt, buy now pay later, and other horrible "financial engineering" but the 30 year mortgage is overall a great thing for everyday people.

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

#203

Post by Jasper_ »

908B64B197 wrote: post #198
josefresco wrote: post #195

Earlier quoted context omitted.

I live in a popular vacation destination. The locals didn't panic when wealthy multiple-home owners started buying up houses because ... their property values were increasing! Now local business can't find workers, towns can't find employees all because housing is out of reach for the working and lower-middle class. Like boiling a frog, most people won't care until it's too late.

> towns can't find employees all because housing is out of reach for the working and lower-middle class. Why not simply increase the supply?

The supply was fine before multi-home owners and property management companies took up most of it and jacked up the prices. Increasing the supply would only increase the wealth of the homeowners, it won't lower prices.

Increasing the supply means building new buildings, and that often means building huge lots of five-over-ones, priced as luxury apartments in a growing market. The people building the new supply expect to make a profit, and in a market with growing prices, they aren't selling for less than what they think they can get out of it.

We see this in big cities where vacancies are at an all-time high (aka a lot more supply), but prices aren't going down.

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

#204

Post by dont__panic »

niij wrote: post #184
dont__panic wrote: post #168

Earlier quoted context omitted.

>> The government lets you deduct your mortgage interest from taxes > > This is effectively not true anymore. Care to explain? Is this because the standard deduction is so high, it's generally not worth itemizing for most people since the Trump tax system adjustment? Genuinely curious; I'm a current renter, hopefully purchasing in the next couple of years. But this is an important part of the buying calculus.

They're correct; at least for the short term. A quick search tells me itemized deduction returns are only ~10% of tax returns right now, down from ~26% before the TCJA. So if you're MFJ you'd need ~$25,000 of home interest and other deductions before you'd even break even itemizing. Not counting the hassle of itemizing vs just claiming the standard deduction. But the higher standard deduction is set to expire in just…

Very interesting point about that higher standard deduction expiring in 3 years, conveniently after the next election. It'll be interesting to see how that pans out on a federal level -- lowering the standard deduction is equivalent to doubling the effective tax rate for many lower-income Americans, after all.

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

#205

Post by throw0101a »

throwaway_1928 wrote: post #190
randomdata wrote: post #150

Earlier quoted context omitted.

I would say the easiest way to explain it is, as implied by the "C", that CPI is intended to track consumption. Houses aren't normally consumed. Your house a decade from now is expected to be, more or less, the same house you purchased originally. You expect, more or less, to be able to sell it for at least as much as you paid for it originally. Whereas a consumable good, like food, is used up once you eat it and the…

> Houses aren't normally consumed. That is just a technicality. Housing is the greatest one time and recurring expense most people have and change in prices for housing has the greatest impact on their perception of how expensive things are.

> That is just a technicality. Housing is the greatest one time and recurring expense most people have and change in prices for housing has the greatest impact on their perception of how expensive things are.

Taken into account, at least in Canada:

> In measuring changes in the cost of owned accommodation, Statistics Canada considers six essential components: mortgage interest cost; replacement cost; property taxes; homeowners’ home and mortgage insurance; maintenance and repairs; and other owned accommodation expenses.

> Rather than looking at the price of purchasing a house, the idea is to treat a homeowner as if they are renting their own dwelling, and track any expenses that a landlord would normally incur. As Fred Barzyk, Director of Consumer Prices Division explains, the question we want to answer in the shelter index, is “what does it cost to run your home?"

* https://www.statcan.gc.ca/en/blog/cs/shelter-cost

See notes on 2021:

> The owned accommodation price index (+4.1%) rose at a faster pace than the rented accommodation price index (+1.7%) in 2021.

> The upkeep of a property, or the homeowners' replacement cost, was up 11.4% on an annual average basis, compared with a 2.0% increase in 2020. The homeowners' replacement cost, a key driver of owned accommodation price growth, is linked to the price of new homes. New home prices rose consistently throughout 2021. The homeowners' replacement cost increased the most in Manitoba (+17.6%), with Prince Edward Island (+14.7%), Quebec (+14.3%) and Nova Scotia (+12.1%) also recording strong annual average movements.

* https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220...

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

#206

Post by Der_Einzige »

throwaway0a5e wrote: post #157
ryandrake wrote: post #137

Earlier quoted context omitted.

One mistake a lot of people make is comparing their monthly mortgage payment to rent. You're not comparing apples to apples. You should be comparing only the interest portion of the payment to rent. The principal portion is money you're paying back into your own pocket in the form of home equity. Your actual "money that goes away like rent" expense is the interest. When you use this as your comparison, a lot more ren…

Treating a mortgage payment as "money I'm lighting on fire" is the safe way to do it if the mortgage is on an asset that you can't liquidate in order to get access to the equity (because you're living in it).

Yeah you can. Boomers who hate their children do it all the time, it's called a reverse mortgage. You stay in the house until you die, then the bank takes it.

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

#207

Post by oh_sigh »

josefresco wrote: post #195
jjoonathan wrote: post #26

Earlier quoted context omitted.

The people in charge have houses and want house prices to go up. That's the beginning, middle, and end of the thinking.

I live in a popular vacation destination. The locals didn't panic when wealthy multiple-home owners started buying up houses because ... their property values were increasing! Now local business can't find workers, towns can't find employees all because housing is out of reach for the working and lower-middle class. Like boiling a frog, most people won't care until it's too late.

I'm sure if they just paid a little bit more they would attract people to drive into the town from the assuredly cheaper nearby towns.

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

#208

Post by bombcar »

ghaff wrote: post #166
bombcar wrote: post #155

Earlier quoted context omitted.

The "principle" amount on a 30 year is negligible for the first 7-10 years or so, which coincidentally is about how long the average homeowner owns a house. People also wildly underestimate just how much taxes and maintenance can be, because they're not monthly - if you have to escrow taxes it's more noticeable, and if you correctly account for maintenance it's surprisingly high, even on relatively new homes. The mor…

>People also wildly underestimate just how much taxes and maintenance can be, because they're not monthly - if you have to escrow taxes it's more noticeable, and if you correctly account for maintenance it's surprisingly high, even on relatively new homes. Even if a house is fully paid off, there are a ton of expenses that relate to ongoing maintenance of a house and property that really can add up--plus taxes and in…

Yeah, even a furnace replacement (was about $8k let's say, including AC) that should be done every 20-30 years is $25-35 a month - those things start to add up if you account for all of them. Roofs are 40 year so you might escape that one, but all the appliances are probably 10-15 year lifespan, and most people wouldn't even think of a new fridge as "maintenance".

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

#209

Post by wonderwonder »

lupire wrote: post #196
marcosdumay wrote: post #113

Earlier quoted context omitted.

People that had money 3 or 4 decades ago tend to own a few houses and get some income from renting. Also, older people think more about downsizing than about upsizing their homes.

Do they also hate their children?

Nope, I would bet a lot of these people had the means to gift their kids a nice down payment for their first home. That's why the best indicator of where you end up financially is where you start.

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

#210

Post by throw0101a »

em500 wrote: post #130
mywittyname wrote: post #109

Earlier quoted context omitted.

The new methodology is clearly the better one. But headlines like this serve to reinforce the notion that somehow the "official" inflation figures are wrong. Which gives power to politicians who deliberately push this narrative; which is to day, dishonest ones. The fact is, lots people hear that "housing prices" aren't included in the CPI, and interpret that as housing costs are not included. There is no nuance for m…

How do you speak clearly and plainly about these topics? It's factually true housing prices aren't included in the CPI, but it's not easy to explain why and how replacing it with the somewhat abstract notion of housing services , estimated by owner equivalent rent is conceptually superior.

> How do you speak clearly and plainly about these topics?

Housing prices are not considered in the CPI ("cost of living") because houses are mostly an asset. Cullen Roche has had some good stuff on the topic:

> House prices are an interesting case. Houses are considered capital investment by the [US] BLS. So, when the value of your home increases that's a good thing as you didn't consume the house. In other words, you don't need to replace the house. Consumption goods are different in that you need to replace the thing you bought. Inflation is very bad for consumption goods because it costs you more to replace that thing each time you need it (food, for instance).

* https://www.pragcap.com/forum/topic/assflation/#postid-2165

* https://web.archive.org/web/20210929154549/https://www.pragc...

> The BLS views housing as a mostly “investment” item as opposed to a consumption item. So, for instance, when you consume a hot dog and have to replace it then the cost of replacement is a direct reflection on your well-being. A $1 hot dog that costs $2 one year later is a material change in living standards, all else equal, since the hot dog is an asset that you literally consume. A house is much more complex. […]

> Of course, anyone who owns a house knows that it’s not that simple. You do basically consume your house over time. For instance, my home has appreciated substantially since I purchased it just 5 years ago and underwent a hellish remodel. At that time the cost of replacement was roughly $300 per square foot. But in the ensuing years the cost of replacement has increased to $400 per square foot. As my physical home falls apart over the years I will need to replace it. But the key point is that, as I replace these components the housing market is likely to revalue the total home value to account for this investment. So even though I am consuming my house over time I am very likely to recoup those costs.

* https://www.pragcap.com/should-house-prices-be-in-the-cpi/

The "C" in CPI stands for consumer. Houses aren't in the CPI for the same reasons stocks and bonds are not: we don't consume them to live.

'Shelter' is considered in the CPI generally though:

* https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc...

For the homeowners' replacement cost, at least in Canada:

> In measuring changes in the cost of owned accommodation, Statistics Canada considers six essential components: mortgage interest cost; replacement cost; property taxes; homeowners’ home and mortgage insurance; maintenance and repairs; and other owned accommodation expenses.

> Rather than looking at the price of purchasing a house, the idea is to treat a homeowner as if they are renting their own dwelling, and track any expenses that a landlord would normally incur. As Fred Barzyk, Director of Consumer Prices Division explains, the question we want to answer in the shelter index, is “what does it cost to run your home?"

* https://www.statcan.gc.ca/en/blog/cs/shelter-cost

See notes on 2021:

> The owned accommodation price index (+4.1%) rose at a faster pace than the rented accommodation price index (+1.7%) in 2021.

> The upkeep of a property, or the homeowners' replacement cost, was up 11.4% on an annual average basis, compared with a 2.0% increase in 2020. The homeowners' replacement cost, a key driver of owned accommodation price growth, is linked to the price of new homes. New home prices rose consistently throughout 2021. The homeowners' replacement cost increased the most in Manitoba (+17.6%), with Prince Edward Island (+14.7%), Quebec (+14.3%) and Nova Scotia (+12.1%) also recording strong annual average movements.

* https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220...

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