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Reality Check on Home Prices [1]
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Date: 2025-03
Reality Check on Home Prices Reporting/Market Focus from the November 2006 Edition of the SGS Newsletter
At subscriber request, SGS is addressing the issue as to how much of the bubble in housing prices really might be accounted for by inflation. Issues on quirks in trade data, previously mentioned as this month’s Reporting/Market Focus, will be addressed in a later publication.
Real Estate Remains An Inflation Hedge. A subscriber mentioned a recent article by a fine economist, where it was argued that home prices, adjusted for inflation, had risen in a manner not seen since before 1900. Further, that left room for a large decline in home prices, which in turn would be a primary recession trigger. With the National Association of Realtors (NAR) just reporting the October median existing home sales price down by 3.5% from a year ago, one could argue that process was underway.
Where the analysis looked at the median prices for existing homes, as published by the NAR, and the CPI as published by the BLS, our subscriber rightly argued that the home prices picture might not be so bad if the series were deflated by the SGS Alternate Consumer Inflation Measure.
Having looked at the numbers, here are some thoughts on the issues raised. The economy is in recession and was in recession before the housing decline started. The weakness in the housing industry certainly will exacerbate the decline in the national economy. Some of the bigger economic problems tied to the housing bubble were the adjustable-rate and low-quality mortgages issued during the housing and refinancing boom. Defaults already are rising sharply, and consumer liquidity is getting pummeled as a result.
Housing prices certainly have risen sharply in recent years, and areas that had the most speculative buying likely will be subject to the most severe price adjustments.
Assuming for a moment that the median sales price of an existing home is the appropriate housing price measure to deflate, the official CPI is not the instrument with which to deflate it.
In theory, the CPI measures housing costs, but it has not done so adequately since the early 1980s, when housing cost measurements were switched to owner’s equivalent rent (what the government estimates you would pay yourself to rent your own home) from home sales prices. The SGS Alternate CPI is corrected for that change.
Looking at the average annual median existing home prices from 2001 to 2005, home prices rose by 43.4% for the four intervening years. For the same period, the SGS Alternate CPI rose by 40.6%. What that indicates is that on average, over time, real estate is a solid hedge against inflation. Real estate does not have the liquidity or portability of gold, but it can be used as an effective inflation hedge.
Still, there are heavily overvalued properties out there that will take a price hit or sit on the market for an extended period. Nonetheless, in a hyperinflationary environment, which looms eventually, even today’s overvalued real estate will act as a significant store of wealth.
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[1] Url:
https://www.shadowstats.com/article/home-prices#:~:text=In%20theory%2C%20the%20CPI%20measures%20housing%20costs%2C,SGS%20Alternate%20CPI%20is%20corrected%20for%20that
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