Posted by: Amey Stone on August 16, 2005
Wondering why inflation figures are so tame when real estate prices are soaring? There is a simple explanation: the Consumer Price Index factors in rising rents, not rising home prices.
The CPI for July was released today and rose 0.5% — just 0.1% (for the third month in a row) when you factor out energy and food prices. But 40% of the core inflation index is tied to rents. The “owners equivalent rent” index (derived from how much homeowners say they could charge in rent), rose by just 0.2%. (There was also a 0.9% drop in apparel prices, a 1% drop in new car prices).
“There are powerful forces holding the inflation rate down going forward, most importantly the weakness in the rental housing market,” commented Dean Baker, co-director of the Center for Economic and Policy Research in Washington, in a research note today.
It’s good for the economy and the stock market that inflation remains low. But are we really getting a true reading on inflation when home price appreciation isn’t added into the mix? I think not.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.