The September release of housing price indices reveals that prices appear to be still in a gentle decline, especially after adjusting for inflation. But after adjusting for the fact that real incomes are growing and borrowing costs are at all-time lows, housing prices are more affordable today than at any time in recent decades, as shown in the chart (below) of housing affordability (when the index is 100, that means a family earning the median income has exactly the income needed to purchase a median-price resale home using conventional financing; levels higher than 100 mean that a median-income family has that much more income than needed).
The recent action in CPI, PPI, unit labor costs and house prices (real estate in general, indeed) is not consistent inflation. Add on the TIPS market.
ReplyDeleteWe need growth, not inflation-fighting.
The Fed is fighting the last war.
Scott,
ReplyDeleteThe inflation adjusted home price shows a general uptrend in price over the long term, but this is not an apples-to-apples comparison. From 1987 to 2010, the average size of a new home built in America increased from 1905 sq ft to 2392 sq. ft or a gain of 25%. If you look at $/sq ft on an inflation adjusted basis, you will see that inflation adjusted home prices are really back to normal levels. Here is the data on new home size.