The Federal Reserve should be challenged about US house price growth of 12%

by Charles Hugh-Smith

Yesterday brought news that would have had staff at the US Federal Reserve running to the office of Chair Jerome Powell in the hope of being the first to tell him about it.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 12.0% annual gain in February, up from 11.2% in the previous month. The 10-City Composite annual increase came in at 11.7%, up from 10.9% in the previous month. The 20-City Composite posted an 11.9% year-over-year gain, up from 11.1% in the previous month………Before seasonal adjustment, the U.S. National Index posted an 1.1% month-over-month increase, while the 10-City and 20-City Composites both posted increases of 1.1% and 1.2% respectively in February.

Chair Powell would have smiled benevolently and would have appreciated this addition.

Phoenix, San Diego, and Seattle reported the highest year-over-year gains among the 20 cities in February. Phoenix led the way with a 17.4% year-over-year price increase, followed by San Diego with a 17.0% increase and Seattle with a 15.4% increase. Nineteen of the 20 cities reported higher price increases in the year ending February 2021 versus the year ending January 2021.

So the gains are broad based and in fact are the best that have been seen for some time.

More than 30 years of S&P CoreLogic Case-Shiller data help us to put February’s results into historical
context. The National Composite’s 12.0% gain is the highest recorded since February 2006, exactly 15
years ago, and lies comfortably in the top decile of historical performance.

There is an obvious issue here in this taking place in a pandemic when the economy has taken a large step backwards. If we look forwards to March I see that Zillow are telling us this.

Already rising at a blistering pace, home price appreciation pressed higher in February as competition for housing remained red hot……… Annual growth is expected to accelerate across the board.

They expect an annual rate of growth of 12.8% when the March data is released caused by factors like these.

As more signs emerge that the economy’s recovery is gathering steam, a wave of eager buyers – many of them seeking their first home purchase – remain determined to find their next home. But with relatively few for-sale homes on the market, bidding wars have become increasingly common, pushing sale prices higher and leading homes to sell at a record pace. In the near-term, it appears unlikely that these upward price pressures will relent meaningfully, particularly as recent retreats in mortgage rates offer many home shoppers increased buying power.

According to Mortgage News Daily the retreats in mortgage rates have continued this month as well.

Mortgage rates have fallen almost every single day in April…….To be fair, sub-3% rates are currently available–especially for purchases–but they’re the exception.  The average lender is closer to 3.125% on refi transactions, and 3.25% for cash-out refis.  Well-qualified borrowers who are willing to pay points (aka, higher closing costs in exchange for a lower rate) can easily get under 3%.


If we now switch to the most followed inflation number for the US we were told this by the Bureau of Labor Statistics.

In March, the Consumer Price Index for All Urban Consumers rose 0.6 percent on a seasonally adjusted basis; rising 2.6 percent over the last 12 months, not seasonally adjusted.

Believe it or not and after reading that house price rises are in double-digits it is likely to be not the official increase in housing inflation called Shelter is officially recorded at 1.7%. We can refine that further because 24% of the US CPI reflects owner occupied housing costs and they assume that home owners pay rent to themselves and they record this rent as rising at 2%. As you are no doubt already thinking they do not pay themselves rent but of course at some point that will have paid to buy the property.

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Anyway as the numbers roll out we see that using house prices rather than fantasy rents would give us a US CPI of 5%. Actually if Zillow are right about March slightly higher. But the principle remains that this measure of US inflation would have people knocking on the US Federal Reserve’s door demanding to know why this was still policy?

First, the Committee expects to delay liftoff from the ELB until PCE inflation has risen to 2 percent and other complementary conditions, consistent with achieving this goal on a sustained basis, have also been met.

Second, with inflation having run persistently below 2 percent, the Committee will aim to achieve inflation moderately above 2 percent for some time in the service of keeping longer-term inflation expectations well anchored at the 2 percent longer-run goal. ( Vice Chair Clarida)

Effective Lower Bound ( ELB) sounds so much more scientific that 0% ( strictly ~0.1% ) doesn’t it? You could add that it does not address the places with negative interest-rates with Switzerland some 0.85% below it. But as you can see arguing that inflation is persistently below target would simply not be possible with CPI at 5%.

Just for clarity the Federal Reserve targets the inflation measure based on Personal Consumption Expenditures or PCE.  Why? Well it does run around 0.4% lower on average. In terms of adjusting it for house prices it is less detailed than the CPI, but if we put in a weighting of 10% for owner-occupied housing then using house prices puts it at 2.6% or above target.

The Economy

We will get the official US GDP reading tomorrow but the New York Fed  now cast tells us this.

The New York Fed Staff Nowcast stands at 6.9% for 2021:Q1 and 4.6% for 2021:Q2. ( annualised numbers)

President Biden seems set to keep pumping up government spending although the outright stimulus plans seem to be changing. Now I note he is saying policies will be funded with taxes. Whilst most well welcome the plan to reverse some of the tax benefits given to the most wealthy that often turns out to be easier said than done.


Part of the issue here is how the establishment has managed to manipulate the debate so that official numbers do not reflect reality. Thus house price rises are presented as wealth effects ignoring the fact that those who actually gain ( sellers and those withdrawing equity) are relatively few. Whereas those entering the market or buying a larger property are facing inflation which is ignored. According to Case-Shiller there is a lot of the latter going on.

many of them seeking their first home purchase

There are many consequences to this such as the young facing a future of rent rather than owning in many cases. But if we return to the US Federal Reserve we see that if we start using real prices to measure inflation rather than imputed or fantasy ones it should now be tightening policy. Instead it seems to make the credit crunch mistake which is to wait and wait rather than look ahead as it is supposed to.

There have been other regular hints about policy. From Yahoo on Monday.

The S&P 500 ticked up to narrowly eke out a record high.



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