Inflation is higher, real incomes lower than reports show. Scrap the dotplot and forward guidance. Ignore the macro models. There is no neutral rate. The Fed doesn't print oil, copper, or potash.
Are you saying that home ownership costs should simply be completely eliminated from CPI calculations? Although I do not know the average homeowner turnover rate, I’m pretty sure it’s less than 10 years. If true, home ownership probably continues to be the largest expense in most household budgets. While OER is definitely a flawed metric, simply ignoring this huge component of American cost of living seems even worse.
Thanks for your thoughtful response Dr. John. I believe only about half of the existing homes in the US are actually owner occupied, so that would alter the turnover rate significantly. I also found several references indicating that the average homeowner moved every 8-12 years, with the time increasing in recent years due to rising prices, interest rates, taxes, etc.
All I know for sure is my personal home insurance, maintenance, and taxes have increased about 25% since 2020, along with the assessed value of my home.
Again, thank you for taking time to help me understand your point of view.
Hi M. Bowser and thank you both for your question and for reading my work. And no, I am not saying home ownership costs should be excluded from the CPI. They should be fully included.
First, a small point regarding how long people own their homes. There are 142 million existing homes in the US and about 4 million existing home sales this year, which implies the average owner stays in place for 142/4=35.5 years before selling. I bought the house I live in a little over 20 years ago for example.
Now to your question. In fact, all actual costs of home ownership are already included in the CPI index, including things like insurance, maintenance and fixing the roof that represent current economic activity paid for by the consumer. The CPI is represented as an out of pocket cost measure, so this makes sense.
My point is simple. The current CPI index adds a massive number called “Owners’ Equivalent Rent”, or OER, that pretends people actually rent their own home from themselves. They make this number up from date on actual rent that renters pay to landlords (which is a real cost and should remain in the index). That means every time rent goes up on actual apartments, the BLS pretends the cost goes up for the 70% of households who own their home too, 40% of whom own their home free and clear with no mortgage. Or, another way to say it, one of the reasons I bought my home was as a hedge to secure housing services for my entire life.
Hope this helps. The difficult art of the question is how to separate the parts of owning a home that are a long term investment issue from the ones that reflect current costs, like insurance and maintenance, which do belong in the index.
Are you saying that home ownership costs should simply be completely eliminated from CPI calculations? Although I do not know the average homeowner turnover rate, I’m pretty sure it’s less than 10 years. If true, home ownership probably continues to be the largest expense in most household budgets. While OER is definitely a flawed metric, simply ignoring this huge component of American cost of living seems even worse.
Thanks for your thoughtful response Dr. John. I believe only about half of the existing homes in the US are actually owner occupied, so that would alter the turnover rate significantly. I also found several references indicating that the average homeowner moved every 8-12 years, with the time increasing in recent years due to rising prices, interest rates, taxes, etc.
All I know for sure is my personal home insurance, maintenance, and taxes have increased about 25% since 2020, along with the assessed value of my home.
Again, thank you for taking time to help me understand your point of view.
Hi M. Bowser and thank you both for your question and for reading my work. And no, I am not saying home ownership costs should be excluded from the CPI. They should be fully included.
First, a small point regarding how long people own their homes. There are 142 million existing homes in the US and about 4 million existing home sales this year, which implies the average owner stays in place for 142/4=35.5 years before selling. I bought the house I live in a little over 20 years ago for example.
Now to your question. In fact, all actual costs of home ownership are already included in the CPI index, including things like insurance, maintenance and fixing the roof that represent current economic activity paid for by the consumer. The CPI is represented as an out of pocket cost measure, so this makes sense.
My point is simple. The current CPI index adds a massive number called “Owners’ Equivalent Rent”, or OER, that pretends people actually rent their own home from themselves. They make this number up from date on actual rent that renters pay to landlords (which is a real cost and should remain in the index). That means every time rent goes up on actual apartments, the BLS pretends the cost goes up for the 70% of households who own their home too, 40% of whom own their home free and clear with no mortgage. Or, another way to say it, one of the reasons I bought my home was as a hedge to secure housing services for my entire life.
Hope this helps. The difficult art of the question is how to separate the parts of owning a home that are a long term investment issue from the ones that reflect current costs, like insurance and maintenance, which do belong in the index.
Regards
Dr. John
Outstanding article!!! Thank you!!