Thank you to the CEPR for sending me this new report. Three main points:
1) Housing prices to rents out of whack (WAY out of whack)
2) Extraordinary (and unsupportable) housing construction
3) Sharp decline in savings rate
And in their conclusion, this frightening point: "The costs of a collapse of the housing bubble will be even greater than the costs of the collapse of the stock bubble, because housing wealth is much more evenly held"
I recommend all readers check out www.cepr.net and also this new report here
November 08, 2005
FLASH: New housing bubble report from the Center for Economic and Policy Research - "Will a Bursting Bubble Trouble Bernanke?"
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2 comments:
Alan Greenspan missed the great inflation of house prices. Something is out of whack with the data used for inflation. For Sure!
You hit it on the head. The number the fed uses is wrong, period. Read:
A new study by Alliance Capital Management's economic research department finds that a chronic underestimation of housing costs, the largest component of the CPI, has led to a 0.6 percentage point annual understatement of inflation since 1998 -- a gap that has grown to 1 percentage point annually in the last two years, with a somewhat greater impact on the core.
The source of the measurement error is the imputation of a rental value for owner-occupied homes. Conceptually, rental equivalence is a good way to measure the cost of housing consumption, which is what the CPI measures. The problem arises when a single survey of rental units is used to impute owner- occupied rents at a time when the characteristics of the two markets are grossly different.
The owner-occupied market is vibrant, with strong demand, fast absorption of new supply and low vacancy rates. The rental market is plagued by weak demand, slow absorption, and high and rising vacancy rates, which hit a 50-year high of 10.4 percent in the first quarter of 2004, according to the Census Bureau's American Housing Survey. That compares with a 1.7 percent vacancy rate in the owner-occupied market in the first quarter, little changed since 1997.
A little history is in order. Until the early 1980s, the Bureau of Labor Statistics calculated housing costs in the CPI from home prices, mortgage interest rates, property taxes, and insurance and maintenance costs.
Because a house is not just a home but also an investment, and because the CPI is a measure of consumption costs, the BLS abandoned the asset-price approach to housing costs in favor of an imputed rental value in 1983
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