S&P Compares Case Shiller to CPI – Home Prices at 2011 levels

Inflation Image by Getty Images via @daylife

Standard & Poors compares the Case Shiller Composite 10 Home Price Index to CPI and shows home prices  are at 2001 home prices adjusted for inflation.

Like any great statistics, it is as accurate as the information you plug-in to it.  I believe the Case Shiller Index is accurate, but I question the accuracy of the CPI.   But it is still a fair benchmark.

The real benchmark to gauge home values by is Rents.  That is an accurate gauge because there is a return on investment and that number is not manipulated by statistics.  Historically speaking, home values have paced inflation – but at the core of that inflation is Rents.

So the future of home values will get back to Rent, which can be somewhat tracked by CPI.  Do you think Inflation will increase in the future?  If so, then you will likely see home prices track upwards with inflation.  Is food and gasoline going up or down in price?  (that is inflation..)

I ran this chart back in October, however I did not adjust home prices for inflation.  I just ran the Home Prices alongside the CPI.

Check out Standard & Poor’s article to see their chart.

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Rents going up in 2012 as Vacancy Rate continues to drop

The National Association of Realtors has great articles about the market shift going into renting vs owning and how that is pulling the vacancy rates lower.  They site National figures, however the Twin Cities is showing even lower vacancy rates than the national average.  This brings us to the law of supply and demand, rents will go up as supply goes down..  Which leads us back to age-old question:  RENT VS OWN?

…The latest census data, which measures rentals of both single-family and multifamily units, report a 9.2 percent vacancy rate, the lowest since 2002.  Private sector data from REIS on just multifamily units at mid-to-large cities in the U.S. fell to a 5.5 percent vacancy rate.

…According to the rent component of the Consumer Price Index, rents rose by 2.1 percent as of September from 12 months ago, after no rent increase in 2010.  Most economists are calling for a further rise in rents in 2012, simply because of the very low levels of construction of apartment units.

Rising rents mean a better rate of return for real estate investors.  Rising rents also mean more renters will be pulling out calculators to see if it makes more sense to buy a home.

Read Full Article (a lot more detail)


Try out your scenario on this RENT VS. OWN CALCULATOR.



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Minnesota Coincident Index improves

The Philadelphia Federal Reserve release their September Coincidence Index Report today.  Minnesota is showing positive improvement.  I am not entirely sure how this will translate into future growth for employment in Minnesota, as this Index is new to me.  It was described to me by an economist as “some bored economist invented this index..”.

This Index is supposed to trend our GDP, which should then translate to into JOBS, which should translate into helping out the Real Estate market. I am not sure what kind of lag time is involved, but if this Index is accurate then we should see job improvement.  This one is new to me, so I am not going to put a lot of trust into this yet – just thought we should keep an eye on it to see if this may be an early indicator.

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

Read Full Report





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NAR Housing economic Outlook 2011-2012

The National Association of Realtors Economic Outlook is showing some interesting forecasts for 2012.  Keep in mind no one has a crystal ball, but the economists go ahead and make forecasts anyhow.  The great thing about economists is they are usually about as accurate as the weather forecasters, yet I continue to listen to the weather forecast anyhow…

As of October 2011, here is what the economists are currently forecasting for 2012.

It looks like they are forecasting very little change in the unemployment rate, nudging down to 8.6%.  I am particularly interested that they are forecasting the 30 year mortgage rate to inch upwards to 5% by the end of 2011.  Apparently they are not expecting much help from Operation Twist, which I think is accurate.


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Their forecast (above)on Existing Home Sales is showing a fairly steady growth through 2012.  While Housing starts and new construction sales are showing a big jump in the last 2 quarters of 2012.  This is showing % change from a year ago.

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The above chart is kind of frightening, take a look at the Real Disposable Income line.  I didn’t realize I had any disposable income and their forecast is showing it is going to get worse!  The GDP is showing a forecast of pretty flat growth and the CPI showing flattening mid 2012.  I would disagree with that, but I am no economist…  I would expect the CPI to increase steadily throughout 2012…

These graphs are just a couple snapshots from their Forecast.  For more information on their Economic Outlook, check out their data here.





Comparing the Minnesota Home Price Index to Inflation, are we at the bottom? Case Shiller, FHFA, and CPI

I pulled some stats from the St Louis Federal Reserve to see how real estate performs with inflation over time.  The result of this is not what I was expecting.  I wanted to show that home prices pace inflation proving it is a nice hedge against inflation.  That is true, however what I discovered is a little more interesting.

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The blue line is CPI, Core Inflation while the Red Line is FHFA’s Minnesota Home Price Index.  Up until the mid 1990’s the home price index tracked just above the CPI, just like I expected.  What I couldn’t help noticing is this Giant Bubble…  Home Prices are still approx 17% apart as of April 2011 (the latest Home Price Index on this chart).  We have dropped even closer since, so our spread is probably closer to 10% now, within negotiating terms.  Sellers are receiving approx 92% of their asking price now.  We are fairly close to the bottom when you look at it in those terms,  within 10% assuming the market doesn’t over-correct…

Going forward I believe we are going to see high inflation like we did in the later 1970’s and early 1980’s, probably more so.  (see Monetary Base chart from earlier post).   If inflation kicks in and home prices find their equilibrium with CPI again, the future may look something below (maybe with a few more peaks and valleys..):

Just a Guess at the Future

Interestingly enough, I spent some time downloading the CPI into excel and running that up against Case Shiller’s Index.  These are indexed at different reference points, so we are only really trying to gauge the separation between them not the actual index value.  The Case Shiller Index suggests to me that we are at bottom when compared to CPI, or at least very close to.  The Minneapolis Case Shiller Index is updated as of July 2011, probably more accurate than April 2011 from the FHFA Home Price Index…

What’s your prediction?  Care to take a guess?  Do you think we will over-correct first?  It is still anyone’s guess at this point…

Inventory has come down, rates are record lows, affordability all time high, rents increasing…  the only thing missing is jobs.