Why Oh Why Can't We Have a Better Press Corps? (Floyd Norris/New York Times Edition)
I cannot believe my eyes...
Suppose somebody offers you a choice between two houses...
- House one costs $375,768.75, which you will finance by paying $75,153.75 down and borrowing the rest at 7% interest, which will give you a mortgage payment of $2000 a month; if you were then to rent out the house, you could rent it for $2200 a month.
- House two costs $447,716.75, which you will finance by paying $75,153.75 down and borrowing the rest at 5% interest, which will give you a mortgage payment of $2000 a month; if you were then to rent out the house, you could rent it for $2200 a month.
Floyd Norris of the New York Times says that the second house is much more expensive--after all, it costs 19% more. The Bureau of Labor Statistics has a different view: the amount of money you have to pay in order to buy the second house is exactly the same, in amounts and in dates, as the amount of money you have to pay in order to buy the first. The amount it would cost to rent the two houses are the same. How can you think of the prices of the two houses as being other than identical?
Floyd Norris appears to think that the Bureau of Labor Statistics is stupid:
What Happens if Inflation Is Overstated? - New York Times: [Y]ou don't have to be a conspiracy theorist to conclude that in the last decade, an important part of the [consumer price] index has been understated. That is the housing component. Since 1983, the government has measured the price of homes not by looking at house prices but by computing what it calls "owner's imputed rent." That is the rental value of the house you own. It accounts for nearly a quarter of the entire Consumer Price Index....
Since  the home price index maintained by the Office of Federal Housing Enterprise Oversight has doubled, while the imputed rent figure has risen by less than a third. Had the government computed the Consumer Price Index using actual home prices since 1996, I estimate that it would have risen by an average of 4.1 percent a year, as opposed to the 2.5 percent reported. The core rate -- inflation excluding food and energy costs -- would be 4.2 percent, not 2.2 percent.
Perhaps the Federal Reserve was too hesitant to raise rates, and thus allowed speculative bubbles to form, because it was seeing inflation through rose-tinted glasses. But now the problem could be the opposite. If the housing boom is ending, rental costs may start to catch up with house prices. The reported inflation rate would be higher than the real rate, at least to people who say the best way to measure home prices is by measuring home prices.
To be sure, some economists like the rental gauge, saying it measures consumption spending. Others think that the best measure is mortgage payments. When interest rates were declining, those rose slower than home prices but faster than imputed rents...
Floyd Norris gives absolutely no sign of understanding any of the issues here. House prices have the big drawback that they rise when interest rates fall even if no homeowner pays any more for a house. Mortgage payments have the drawback that when inflation rises mortgage payments rise too even though homeowners gain in nominal appreciation what they lose in extra monthly payments. Rental equivalent values are--the BLS thinks for very good reasons, and I think too--the best way to construct the CPI. The BLS has thought about this a lot.
You won't get any of that thinking, or any idea of what the issues are, or any understanding of why the BLS has made the choices it has, by reading Floyd Norris's piece.
All you will get is:
[Y]ou don't have to be a conspiracy theorist to conclude that... an important part of the [consumer price] index has been understated... the housing component.... Had the government computed the Consumer Price Index using actual home prices... [t]he core rate -- inflation excluding food and energy costs -- would be 4.2 percent, not 2.2 percent.