Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20
AMAZON Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 11th Jan 20
Gold Price Reacting to Global Flash Points - 11th Jan 20
Land Rover Discovery Sport 2020 - What You Need to Know Before Buying - 11th Jan 20
Gold Buying Precarious - 11th Jan 20
The Crazy Stock Market Train to Bull Eternity - 11th Jan 20
Gold Gann Angle Update - 10th Jan 20
Gold In Rally Mode Suggests Commitment of Traders (COT) Data - 10th Jan 20
Disney Could Mount Its Biggest Rally in 2020 - 10th Jan 20
How on Earth Can Gold Decline During the U.S. – Iran Crisis? - 10th Jan 20
Getting Your HR Budget in Line - 10th Jan 20
The Fed Protects Gamblers at the Expense of the Economy - 9th Jan 20
Last Chance to Get Microsoft Windows 10 for FREE! - 9th Jan 20
The Stock Market is the Opiate of the Masses - 9th Jan 20
Is The Energy Sector Setting Up Another Great Entry? - 9th Jan 20
The Fed Is Creating a Monster Bubble - 9th Jan 20
If History Repeats, Video Game Stocks Could Soar 600%+ - 9th Jan 20
What to Know Before Buying a Land Rover Discovery Sport in 2020 - 8th Jan 20
Stock Market Forecast 2020 Trend Analysis - 8th Jan 20
Gold Price at Resistance - 8th Jan 20
The Fed Has Quietly Started QE4 - 8th Jan 20
NASDAQ Set to Fall 1000pts Early 2020, and What it Means for Gold Price - 8th Jan 20
Gold 2020 - Financial Analysts and Major Financial Institutions Outlook - 8th Jan 20
Stock Market Trend Review - 8th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Case Shiller Home Price Index the Leading Indicator of Economic Downturn

Economics / US Economy Feb 07, 2008 - 01:21 PM GMT

By: Tim_Iacono

Economics Best Financial Markets Analysis ArticleBy popular demand, the collection of charts featuring the S&P Case-Shiller Home Price Index has been updated. First, the home price index versus one of stupidest things that economists have ever dreamed up - the home ownership cost substitute used in the consumer price index, otherwise known as "owners' equivalent rent".


CS-HPI and OER

No, it is not being suggested that the HPI be used in place of OER in the inflation statistics because there are other factors that should be included as well - interest rates, property taxes, etc. The chart above simply demonstrates how completely different these two measures are and how disconnected OER and home prices had become.

ooo

As shown below, the absence of real home prices in the Consumer Price Index is a vital ingredient in creating a really big housing bubble. No central banker in their right mind would have short-term rates at one percent, as was the case in the U.S. back in 2003 and 2004, if the inflation rate was at five or six percent.

CS-HPI and CPI

Of course, when looking at the initial monthly mortgage payments that people were signing up to a few years back, the actual monthly costs were not rising anywhere near as fast as actual home prices. This, in itself, should have been a big red warning light that there was something wrong in the financial system rather than it being accepted as conventional wisdom at the time that a "new era" had begun and we were all getting rich.

ooo

In recent months, the slide in home prices has been overwhelmed by soaring energy prices in the chart above, however, if food and energy are removed from the price index, as economists are wont to do to calculate core inflation , another big red warning light is clear to see in the chart below.

CS-HPI and Core CPI

If real home prices are substituted for the almost 30 percent weighted OER component in core inflation, that important inflation statistic would now be minus one percent, and people would be talking about the dreaded "D" word that contemporary economists abhor - "Deflation".

ooo

A recent addition to the known list of fun things you can do with the Case-Shiller Home Price Index is to lay it up against all sorts of other economic statistics. For example, you can put the HPI curve up against job growth as shown below and get the expected results. Housing bubbles are generally good for creating jobs - all the way up to the point when they start deflating.

CS-HPI an NFP

Yes, breaking out some of the individual labor categories, such as residential construction and retail trade, would be the next logical step here. Maybe next time.

ooo

Good news for the banking industry! Credit cards are making a strong comeback now that home prices are declining and home equity ATMs are being shut down all across the country, largely due to there being little or no equity left to borrow because of that plunging red curve below.

CS-HPI and Revolving Credit

Just last week, Countrywide Financial (NYSE: CFC ) sent out over 100,000 letters to homeowners telling them that, due to changing market conditions (i.e., plunging home prices), they could no longer "tap" as much (or, in many cases, any ) home equity. Credit card usage, the primary component in revolving debt, is soaring again.

ooo

Speaking of CountryWide, it's kind of surprising to see that year-over-year home prices had to get well into negative territory before the share price of the nation's largest mortgage lender began to plunge.

CS-HPI and CFC

Then again, the housing price data gets reported about three months after the fact, so, right around the time it became clear that home prices were going down and not up, that's when the going got rough for Angelo Mozilo and company.

By Tim Iacono
Email : mailto:tim@iaconoresearch.com
http://www.iaconoresearch.com
http://themessthatgreenspanmade.blogspot.com/

Tim Iacano is an engineer by profession, with a keen understanding of human nature, his study of economics and financial markets began in earnest in the late 1990s - this is where it has led. he is self taught and self sufficient - analyst, writer, webmaster, marketer, bill-collector, and bill-payer. This is intended to be a long-term operation where the only items that will ever be offered for sale to the public are subscriptions to his service and books that he plans to write in the years ahead.

Copyright © 2008 Iacono Research, LLC - All Rights Reserved

Tim Iacono Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules