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Hey, I like this chart, and was wondering about the assumptions it incorporates about recent inflation.
I am not an economist, and maybe someone can correct my thinking. But I suspect that inflation has been much higher in recent years than the official numbers reflect, and I suspect that a lot of that inflation was caused by the Fed lowering its benchmark interest rate so far and keeping it so low for so long, causing all the bubbles in credit and asset markets, etc.
So maybe some portion (not all, I'm sure) of that spike in that graph may be due to the authors of that study under-counting recent inflation? I'm sure they used official numbers, but if official numbers are wrong, then their graph would be, to some extent, wrong too.
Here is the crux of my thinking:
Remember that equation from Econ class, MV = PY?
M = money supply
V = velocity of money
P = price level
Y = level of output in the economy
Another way to look at the equation is like this:
(% change in M) + (% change in V) = (% change in P) + (% change in Y)
% change in P is what we call "inflation".
So, assume M is constant (I don't think the US was necessarily printing more dollar bills than usual recently), and assume Y is more or less constant (GDP goes up, it goes down, but that's not what we're talking about here I think. Besides, I think you're supposed to assume real GDP stays pretty constant over short periods of time, at least in easy econ classes like I took).
When the Fed lowers interest rates, that gooses banks to increase lending (increases their profit -- they get the money cheaper, and still lend it out to you at a higher rate, so more potential profit from lending). More borrowing and lending constitutes an increase in the velocity of money -- V gets bigger, or the % change in V goes up.
If M if fixed, V goes up, and Y is fixed, then looking at the equation, P (or the % change in P, inflation) goes up.
If V goes up a lot, then P goes up a lot.
It seems that, with record low Fed rates and new credit markets developing in recent years (the whole CMO/CDO market is a pretty new thing I think), there was probably a gigantic increase in V, right? This would have to correspond to a huge increase in P, wouldn't it? And now our money just doesn't buy very much, and all the models and celebrities (and even drug dealers) are insisting on getting paid in Euros because dollars just don't hold their value anymore.
So, some portion of the unexplained rise in asset prices, including food and oil and commodities as well as real estate (not all of the rise, but some), could be due to unrecognized inflation.
I guess that now that credit markets are in such a bad way, V is going way down, so P should fall? It seems that Y (basically, real GDP) is falling too now, taking pressure off of prices but still not a good thing.
Who wants to rent and never feel like you are really "at home"? - I like the fact that I can do ANYTHING I want with my home - a renter cant. Geez this poor guy wants to put his family in a home - not wait around for 5 years until he gets a good investment - remember a home is not just an investment - it is your life
I tend to have a much different opinion than you on this matter. My home is not my life. My family is... I rent a luxury home, in a desireable Fairfax County community, that would have sold for about $600k at the peak of the boom. My rent is less than half of what the PITI would be if I decided to purchase this property. And trust me when I say that I feel "at home" when I'm enjoying time with my family. Another benefit of renting, and consequently spending less money on shelter, is that I'm able to invest >$2k per month in a high-yield money market account and various dividend paying foreign stocks (don't get me started on the prospects of the U.S. stock market). Purchasing a home will never provide the kind of financial security that I'm currently building for my family's future.
In a few years, when prices have eroded enough, returning to more reasonable levels, I will consider purchasing a home. But I am not the type of person whose house will define me. You won't see me at a cocktail party bragging about my granite countertops or my grand foyer. A home is where you hang your hat and where you sleep at night. A home is not an investment. For those that truly believe that buying and living in a home will make you wealthy, you are badly mistaken. This boom was completely artificial and as time drags on and the prices continue to slide, there will be no more debate, it will be clear for all to see.
Hey, I like this chart, and was wondering about the assumptions it incorporates about recent inflation.
I am not an economist, and maybe someone can correct my thinking. But I suspect that inflation has been much higher in recent years than the official numbers reflect, and I suspect that a lot of that inflation was caused by the Fed lowering its benchmark interest rate so far and keeping it so low for so long, causing all the bubbles in credit and asset markets, etc.
So maybe some portion (not all, I'm sure) of that spike in that graph may be due to the authors of that study under-counting recent inflation? I'm sure they used official numbers, but if official numbers are wrong, then their graph would be, to some extent, wrong too.
Here is the crux of my thinking:
Remember that equation from Econ class, MV = PY?
M = money supply
V = velocity of money
P = price level
Y = level of output in the economy
Another way to look at the equation is like this:
(% change in M) + (% change in V) = (% change in P) + (% change in Y)
% change in P is what we call "inflation".
So, assume M is constant (I don't think the US was necessarily printing more dollar bills than usual recently), and assume Y is more or less constant (GDP goes up, it goes down, but that's not what we're talking about here I think. Besides, I think you're supposed to assume real GDP stays pretty constant over short periods of time, at least in easy econ classes like I took).
When the Fed lowers interest rates, that gooses banks to increase lending (increases their profit -- they get the money cheaper, and still lend it out to you at a higher rate, so more potential profit from lending). More borrowing and lending constitutes an increase in the velocity of money -- V gets bigger, or the % change in V goes up.
If M if fixed, V goes up, and Y is fixed, then looking at the equation, P (or the % change in P, inflation) goes up.
If V goes up a lot, then P goes up a lot.
It seems that, with record low Fed rates and new credit markets developing in recent years (the whole CMO/CDO market is a pretty new thing I think), there was probably a gigantic increase in V, right? This would have to correspond to a huge increase in P, wouldn't it? And now our money just doesn't buy very much, and all the models and celebrities (and even drug dealers) are insisting on getting paid in Euros because dollars just don't hold their value anymore.
So, some portion of the unexplained rise in asset prices, including food and oil and commodities as well as real estate (not all of the rise, but some), could be due to unrecognized inflation.
I guess that now that credit markets are in such a bad way, V is going way down, so P should fall? It seems that Y (basically, real GDP) is falling too now, taking pressure off of prices but still not a good thing.
Anyway, good chart. Sure gives one pause.
Actually, the money supply has been increasing at a very high rate. The entire money supply, as measured by the FED, was referred to as M3. A couple of years ago, the FED decided it would no longer publish M3 (I have my own opinion of why they did this). However, all of the sub-components of the M3 are still being published. This means that the money supply can still be calculated and tracked. This has become known as "shadow" M3 and can be viewed from the link below. It is estimated that the money supply is currently being increased at the rate of 15% per year.
And yes, I truly believe that the CPI numbers from the government is a joke. While in office, Clinton changed the way CPI was calculated. Using the link below you can see what the CPI would be if we still used the old methods of computing it.
So yes, I too realize that the spike on the chart in question is much higher than it would be if inflation was properly reported. But Shiller is a bright man, I would be surprised if he hasn't accounted for this change in how CPI was computed... that is something I would like to find out.
Nevertheless, home prices are inflated because even if the "real" inflation rate is >10%, wages certainly have not increased anywhere near that rate. For that reason, home prices cannot be sustained.
Actually, the money supply has been increasing at a very high rate. The entire money supply, as measured by the FED, was referred to as M3. A couple of years ago, the FED decided it would no longer publish M3 (I have my own opinion of why they did this). However, all of the sub-components of the M3 are still being published. This means that the money supply can still be calculated and tracked. This has become known as "shadow" M3 and can be viewed from the link below. It is estimated that the money supply is currently being increased at the rate of 15% per year.
And yes, I truly believe that the CPI numbers from the government is a joke. While in office, Clinton changed the way CPI was calculated. Using the link below you can see what the CPI would be if we still used the old methods of computing it.
So yes, I too realize that the spike on the chart in question is much higher than it would be if inflation was properly reported. But Shiller is a bright man, I would be surprised if he hasn't accounted for this change in how CPI was computed... that is something I would like to find out.
Nevertheless, home prices are inflated because even if the "real" inflation rate is >10%, wages certainly have not increased anywhere near that rate. For that reason, home prices cannot be sustained.
Well, yes, you're right, home prices have gotten too high. It's just fun to figure out the numbers and try to get a handle on just how high is too high.
Actually, the money supply has been increasing at a very high rate. The entire money supply, as measured by the FED, was referred to as M3. A couple of years ago, the FED decided it would no longer publish M3 (I have my own opinion of why they did this). However, all of the sub-components of the M3 are still being published. This means that the money supply can still be calculated and tracked. This has become known as "shadow" M3 and can be viewed from the link below. It is estimated that the money supply is currently being increased at the rate of 15% per year.
And yes, I truly believe that the CPI numbers from the government is a joke. While in office, Clinton changed the way CPI was calculated. Using the link below you can see what the CPI would be if we still used the old methods of computing it.
So yes, I too realize that the spike on the chart in question is much higher than it would be if inflation was properly reported. But Shiller is a bright man, I would be surprised if he hasn't accounted for this change in how CPI was computed... that is something I would like to find out.
Nevertheless, home prices are inflated because even if the "real" inflation rate is >10%, wages certainly have not increased anywhere near that rate. For that reason, home prices cannot be sustained.
Wow, plugging these guys' inflation numbers in to a spread sheet almost exactly mirrors what's been going on with housing prices in my neighborhood (I don't live in the DC area by the way, and my city didn't see the same sort of price appreciation as DC). This could be really handy in making decisions when I move to DC this year. Thanks!
Wow, plugging these guys' inflation numbers in to a spread sheet almost exactly mirrors what's been going on with housing prices in my neighborhood (I don't live in the DC area by the way, and my city didn't see the same sort of price appreciation as DC). This could be really handy in making decisions when I move to DC this year. Thanks!
I'm not sure how this would matter much? The current incomes in this area do not support the current prices. So whether or not house prices have been correlated with the "real" inflation rate doesn't matter IMO.
I first saw the following excerpt on another blog that I frequent... This is why the housing bust is just beginning....
"The amount Americans must spend each month on debt service, housing, medical care, food and energy rose to 66.9 percent of their total spending in December, the highest since record-keeping began in 1980, according to Bloomberg figures."
I'm not sure how this would matter much? The current incomes in this area do not support the current prices. So whether or not house prices have been correlated with the "real" inflation rate doesn't matter IMO.
I first saw the following excerpt on another blog that frequent... This is why the housing bust is just beginning....
"The amount Americans must spend each month on debt service, housing, medical care, food and energy rose to 66.9 percent of their total spending in December, the highest since record-keeping began in 1980, according to Bloomberg figures."
If housing prices in a particular area have not risen by any more than inflation that means that their actual value hasn't budged at all. That's the whole point of looking at inflation rates -- to compare prices over time.
If housing prices in a particular area have not risen by any more than inflation that means that their actual value hasn't budged at all. That's the whole point of looking at inflation rates -- to compare prices over time.
I think we're going in circles here...
Based upon official government inflation figures (CPI), housing prices have increased tremendously more than the rate of inflation and wages have basically been flat when inflation is considered.
Alternatively, based upon what some would say is the "real" inflation rate (much higher than the CPI), housing prices have still increased by more than the rate of inflation, but wages have severely decreased when compared to inflation.
No matter which of these two possibilities you choose, housing has become severely unaffordable to the American public. This is why housing prices are dropping.
If I understand you correctly, your belief is that inflation is higher than reported in the CPI, and that means housing isn't as overpriced as some might think... but you fail to mention that if inflation is that high, wages are decreasing in real terms, thus making houses more unaffordable by the day!
And since this thread has drifted over to the topic of inflation...
"As the widely praised “economic stimulus” bill was signed into law, the only dissent heard was from those saying the plan did not go far enough. Speaking for those unheard voices who disagree with the strategy entirely, I believe the most significant aspect of the plan is that it creates a new and improved method for delivering inflation."
And since this thread has drifted over to the topic of inflation...
"As the widely praised “economic stimulus” bill was signed into law, the only dissent heard was from those saying the plan did not go far enough. Speaking for those unheard voices who disagree with the strategy entirely, I believe the most significant aspect of the plan is that it creates a new and improved method for delivering inflation."
No no no, the problem with the stimulus package is that it won't have any impact at all other than to decrease incentives to work, like any other time the Government takes money from people.
If you take money from one set of US taxpayers and give it to another set of US taxpayers, is there really more money floating around in the economy? No. The ones you taxed have less money, and the ones you mailed checks to have more money. Net change = zero. If you take money from more productive tax payers ("the rich") and give it to less productive tax payers ("the poor") you decrease the incentive for people to work, which is bad for the economy.
That is, unless the government is planning to pay for the rebate checks by printing more money, which, after this discussion, I wouldn't put passed them.
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