<![CDATA[Hedgehogs.net: '' related content]]> http://www.hedgehogs.net/tag/economic+theories?view=rss http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11419622/mystery-of-the-unexpected-explained-japan-slides-into-recession-yet-again-blue-ribbon-panel-in-review Wed, 19 Nov 2014 12:42:10 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11419622/mystery-of-the-unexpected-explained-japan-slides-into-recession-yet-again-blue-ribbon-panel-in-review <![CDATA["Mystery of the Unexpected" Explained; Japan Slides Into Recession Yet Again; Blue Ribbon Panel in Review]]>
Unadjusted for price changes, the Japanese economy contracted an annualized 3 percent, the Cabinet Office said.

None of this was "expected". We will explore "why" in a moment. First consider some headlines.

Bloomberg: Japan Unexpectedly Enters Recession as Abe Weighs Tax.

Wall Street Journal: Japan Falls Into Recession. GDP Declines 1.6%, Setting Stage for Delay in [Another] Sales-Tax Increase.

Time: Japan Sinks Into Recession (Again).

Time Reports ...

An unexpected contraction in quarterly GDP shows that Prime Minister Shinzo Abe’s radical economic program is badly broken. GDP in the quarter ended September shrank by an annualized 1.6% — far, far worse than the consensus forecasts. That followed a disastrous 7.3% contraction in the previous quarter. Speculation in Japan is that the bad results will push Abe to call a snap election only two years after taking office.

Financial Times: Sales Tax Tips Japan Back Into Recession

Financial Times Reports ...
Japan is poised for a snap election after its economy tipped into a technical recession, increasing the odds that prime minister Shinzo Abe will delay plans to raise the country’s sales tax next year and appeal for a fresh mandate.

Monday’s preliminary data for the period between July and September was far worse than markets expected, showing the economy shrank 1.6 per cent quarter-on-quarter on an annualised basis. Analysts had expected growth of 2.2 per cent.

The dip is a blow for “Abenomics”, the most ambitious attempt to revive Japan’s economy since it fell into stagnation two decades ago.
Expectation vs. Reality

  1. Expectation: Last quarter's huge plunge was a one-time affair.
  2. Expectation: 2.2% growth this quarter.

Instead, Japan's economy shrank 1.6% and last quarter was revised lower from negative 7.1% to negative 7.3%.

Blue Ribbon Panel in Review

Flashback August 31, 2013: Japan Seeks to Hike Taxes then Waste Money on Stimulus to Make Up for Decline in Spending.

My comment: "When you cherry pick a panel, and the panel has a pre-determined outcome, the answer always comes out the way you expect. Thus Abe's blue ribbon panel concluded tax hikes won't hurt. And for good measure, if by some chance they do, the panel suggested wasting those tax dollars on stimulus. Good grief!"

Flashback April 30, 2014: Japan Output and New Orders Decline at Fastest Pace Since 2012; Abenomics in Review

My Comment: "Abenomics said Japanese stimulus efforts would offset tax hikes. I disagreed. Although one month is not proof, Markit reports Japanese Output and New Orders Decline For First Time in 14 Months Following Tax Hike."

Flashback September 8, 2014: Japanese Economy Contracts Bigger than Expected 7.1% in 2nd Quarter; Really Bad Theories

My Comment: "By now it should be pretty clear that Abenomics is a complete failure. Abenomics did not spur lending, investment, hiring, or wage growth. It's one touted 'success' is that prices have gone up. And for cash-strapped consumers facing higher taxes, that alleged "success" is actually a disaster."

In September, I also commented on "really bad theories".
Really Bad Theories

"Theoretically, there should be no impact from the consumption tax increase on corporate spending or long-term corporate planning, but a large number of Japanese corporations seemed to see a large impact from the hike on final demand," said Junko Nishioka, an economist at RBS Japan Securities in Tokyo.

Good grief. Nishioka has theories, but they are as sound as a home foundation in a swamp. Here's an easy to understand explanation.

Eight Point Explanation

  1. Japan's sales tax increased from 5% to 8%.
  2. Wages did not go up.
  3. Consumers have 3% less money to spend.
  4. Consumers with less money, spend less.
  5. Businesses faced with a slowdown in consumer spending reduce future plans.
  6. Abe plans to hike the sales tax again and businesses know that as well.
  7. Business sentiment sours.
  8. Japanese demographics are such that businesses already have substantial worries.

What is it about those eight points that economist Nishioka fails to understand?
Mystery Explained

Why all of this is so "unexpected" is an apparent mystery. Sales tax hikes do not spur the economy, no matter how much of it government wastes. And it should not take a genius or an 8-point synopsis to figure that out.

So why was this news so "unexpected" in nearly every quarter? I have two answers.

  1. Economists are the most optimistic lot on the planet. They believe what they want to believe.
  2. The average economist also believes in Monetarist and Keynesian fairy tales.

Japan is living proof of the absolute stupidity of Abenomics (a combination of Keynesian and Monetarist stupidity), yet academia, let by economist Paul Krugman concludes "Japan did not do enough".

Apparently, debt to the tune of 250% of GDP fighting deflation was not enough. 500% would not have been enough either, for obvious reasons.

But don't expect any Keynesian or Monetarist clowns to admit that. They will never stop believing in fairy tales.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com]]>
11419622
http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11419621/debt-trap-nonsense-eurosceptics-on-rise-demise-of-the-eu-soon-there-wont-be-a-europe-says-telegraph Wed, 19 Nov 2014 12:42:07 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11419621/debt-trap-nonsense-eurosceptics-on-rise-demise-of-the-eu-soon-there-wont-be-a-europe-says-telegraph <![CDATA["Debt Trap" Nonsense; Eurosceptics on Rise; Demise of the EU: "Soon There Won't be a Europe" Says Telegraph]]> Eurozone Breakup Coming

Telegraph writer Jeremy Warner moans Soon, There Won’t be a Europe to be Part Of.

"It’s not a question of in or out, but of whether Britain can avoid the flames of destruction," says Warner.

On that I certainly agree. In general, Warner has the "what's happening" part correct has but his synopsis of what to do about things is exactly the same tried-and-failed Keynesian and monetarist clatrap the Telegraph always sponsors.

Warner's nonsense culminates with "It is an economic truth pretty much universally acknowledged that you cannot deflate your way out of a debt trap, yet it seems entirely lost on the eurozone high command."

Europe is really attempting deflate? Really? In what alternate universe?

Debt Trap Nonsense

The entire notion there is such a thing as a "debt trap" is a Keynesian-sponsored fallacy.

The facts of the matter are simple:

  1. Central bank Monetarists in conjunction with Keynesian fiscal fools created the "debt problem" with absurd inflationary policies.
  2.  
  3. Now that debt-bubbles have burst, Jeremy Warner, like his Telegraph counterpart, Ambrose Evans-Pritchard and multitudes of writers and academics, expect the same polices that created the debt problem to cure it!

Attempts to inflate out of alleged "debt traps" are nothing more than absurd can-kicking exercises that defy common sense. Japan is real-life proof.

Rise of the Eurosceptics  

Let's leave the "why" and the "what to do about things" aside and instead focus on Warner's perception of what is happening right now on the eurosceptic front.
Across the continent, traditional centrist politics are in a state of meltdown. Nowhere is this more apparent than in Spain, where a radical Left party that didn’t even exist 10 months ago is now topping the polls. Ill-judged attempts by the Rajoy government to use the crisis as a means of strengthening Madrid’s grip on the country have meanwhile reignited Spain’s centuries old centrifugal forces. It’s not just the Catalans who threaten to break away.

What goes for Spain is just a proxy for Europe as a whole, where attempts to impose fiscal discipline from the centre have resulted only in growing public alienation and anger. In France, the polls are led by an anti-European crypto-fascist with a Left-wing agenda that makes even the disastrous François Hollande look moderate.

In Italy, the only viable alternative to the beleaguered Matteo Renzi is a professional comedian, Beppe Grillo, with no apparent policies at all, or few that make any sense. Even in Germany, the protest vote is fast gaining momentum. As with Ukip, Alternativ für Deutschland has taken off like a rocket since it widened its appeal from the single purpose of bringing back the beloved Deutschmark to an anti-immigrant, law and order, agenda.
Brainwashing Messages and Fake Tories

In the Telegraph comment section, "Richard N" offers this accurate assessment of what Warner wrote.
To say Grillo's party doesn't have any policies is just stupid: he is expending most of his time and energy - very noisily - on getting a referendum on Italy leaving the euro.

He says that Italy's desperate financial straights are due in large part to being in the euro. That is a policy - and an eminently sensible one for Italy.

As for Le Pen being a crypto-fascist - that's an equally stupid thing to say. She is a left-wing nationalist - it's that simple.

You guys at the Telegraph do the same thing as the fake eurosceptic MPs in the Tory party - mouth the eurosceptic stuff - but inject the EU's brainwashing messages in between the lines, to attack those new political parties which threaten the power of the incompetent, power-hungry goons running the EU.
Keynesian and Monetarist Silliness

Actually, its not just brainwashing efforts by the EU, but also by central banks, politicians who want more taxes and more spending, academics like Paul Krugman, and monetarists such as Ambrose Evans-Pritchard and Harvard professor Greg Mankiw.


Status Quo is Dead

Aside from the ad hominum and personal attacks, Warner has the eurosceptic trend correct. His conclusion is also accurate:

"The European Union is failing. Whether we are in or out scarcely seems to matter any more. In imagining it does, many of our leading businesses and politicians are woefully behind the curve. Something will eventually emerge from the wreckage. But whatever it is, it won’t be the status quo."

Indeed. Something will emerge from the inevitable wreckage, and it will not be the status quo.

On one hand, that's encouraging. However, I must warn: never underestimate the propensity of central bankers and politicians to make matters worse, with Keynesian and Monetarist fools cheering every step of the way.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com]]>
11419621
http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11414892/201493-pricing-decisions-in-an-experimental-dynamic-stochastic-general-equilibrium-economy Fri, 14 Nov 2014 03:38:13 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11414892/201493-pricing-decisions-in-an-experimental-dynamic-stochastic-general-equilibrium-economy <![CDATA[2014-93: Pricing decisions in an experimental dynamic stochastic general equilibrium economy]]> 11414892 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11414285/home-prices-since-1870-no-price-like-home Wed, 12 Nov 2014 15:21:32 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11414285/home-prices-since-1870-no-price-like-home <![CDATA[Home prices since 1870: No price like home]]>

By Katharina Knoll, Moritz Schularick, and Thomas Steger

read more...

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11412666/indias-inflation-may-ease-to-new-lows Wed, 12 Nov 2014 06:48:15 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11412666/indias-inflation-may-ease-to-new-lows <![CDATA[India's Inflation May Ease to New Lows]]> 11412666 http://www.hedgehogs.net/pg/blog/CentralBankNews/read/11409632/poland-holds-rate-as-growth-limits-risk-of-low-inflation Wed, 05 Nov 2014 15:33:12 +0000 http://www.hedgehogs.net/pg/blog/CentralBankNews/read/11409632/poland-holds-rate-as-growth-limits-risk-of-low-inflation <![CDATA[Poland holds rate as growth limits risk of low inflation]]>     Poland's central bank left its monetary policy reference rate stable at 2.0 percent, surprising economists who had expected another rate cut, saying economic growth and last month's easing of monetary policy would limit the risk of inflation remaining below the bank's target.
    However, the National Bank of Poland (NBP), which cut its rate by a higher-than-expected 50 basis points on Oct. 8, noted the uncertainty surrounding the prospects for the country's economy and it said it "does not rule out further adjustment of monetary policy, should the incoming data point to a risk of deterioration in economic growth outlook."
    


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11409632
http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11408360/japanese-style-deflation-coming-where-fed-falling-behind-the-curve-which-way Sat, 01 Nov 2014 16:09:38 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11408360/japanese-style-deflation-coming-where-fed-falling-behind-the-curve-which-way <![CDATA[Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way?]]> Absolute Return Partners October 2014 Letter, by Niels C. Jensen, most of which I agree with, others not.
Japan-Style Deflation in Our Backyard?

It is no secret that we have been long-standing believers in deflation being a more probable outcome of the 2008-09 crisis than high inflation. What has changed over the past six months is that the world has begun to move in different directions. Whereas rising unit labour costs in the U.S. make outright deflation in that country quite unlikely, the same cannot be said of the Eurozone.



Japan-style deflation across the Eurozone is no longer an outrageous thought. As you can see from chart 1, there is a close link between CPI and demographics. That has certainly been the case in Japan and I don’t see any reasons why it should be any different in Europe. The negative demographic trends are perhaps not as acute in Europe as they were in Japan in the early to mid 1990s, so one might expect a less dramatic outcome here, but the writing is on the wall. Furthermore, Japan’s problems were multiplied due to an almost complete lack of political recognition and willingness to take drastic action. At least, with Mario Draghi in charge of the ECB, there seems to be a willingness to do something.
Deflation and "Willingness To Do Something"

Jensen is mistaken about Japan's willingness to take action. Japan has a debt-to-GDP ratio of 250%, highest of any major developed country, as a direct consequence of fighting deflation.

Japan piled on debt, built bridges to nowhere, and engaged in other wasteful spending, all of which made matters worse. Taking on debt to fight deflation is insane. Yet that is exactly what France and Italy want now!

Japan's QE certainly did not help either. Both policies addicted Japan to 0% interest rates forever (until of course Japan blows up).

To suggest that the ECB can do something meaningful with European demographics being what they are, the flaws in the euro being what they are, and lack of willingness for France and Italy to initiate badly-needed structural reforms, is simply wrong.

Holding down interest rates and state-sponsored stimulus will have the identical result as in Japan.

As for wages, they are actually rising not only in the US, but also in Europe as I pointed out in European Service Prices Plunge at Steepest Rate Since January 2010; Reflections on Keynesian Stupidity.

In the US, the Fed did stave off for now, another round of price deflation. However, that came at the expense of creating monstrous asset bubbles.

The bursting of asset bubbles is inherently deflationary, and much more damaging than falling prices because of the impact asset prices have on asset-based loans.

I propose falling prices should be welcome across the board.

Behind the Curve?
Is the Fed Falling Behind the Curve?

As mentioned earlier, the picture in the U.S. – and to a degree also in the UK - is quite different. The Fed increasingly looks like it is behind the curve with the Fed Funds rate remaining unchanged despite a significant rise in unit labour costs.



Not only does that suggest a meaningful rise in the U.S. policy rate over the next couple of years – and therefore also possibly a further rise in longer term rates - but it also suggests a relatively strong U.S. dollar. Forward rates on the Fed Funds rate suggest it will reach 1.50% by June of next year; however, if the latest estimates for unit labour costs are painting a true picture of inflation in the pipeline, one could argue that the Fed Funds rate could go substantially higher.
Behind the Curve? Which Way?

Curiously, St. Louis Fed Governor James Bullard says Fed Should Consider Delay in Ending QE because "Inflation expectations are declining in the U.S."

That's nonsense of course because of the asset bubbles the Fed spawned. With interest rates so low across the world, the chase for yield is on.

Opportunity in Japan
Which Equity Markets Offer Most Potential?

One area I have not elaborated on yet is Japan. There are strong indications that Japan has finally turned the corner economically. At the same time, return on equity has returned to pre-crisis levels in Japan, but valuations have not.

Japanese return on equity is back to an all-time high



With a more or less fully priced U.S. equity market and a Federal Reserve Bank at risk of falling seriously behind the curve, and a Europe where it is hard to see where growth is going to come from (ex. U.K.), Japan looks remarkably interesting, and I expect it to be one of the better performing mature equity markets over the next few years. Just don’t forget to hedge your currency risk. I am not saying that the Yen will fall, but there is enough uncertainty surrounding the Yen that I would rather not have to worry about that aspect.
Japanese Equities and the Yen

It's certainly debatable whether Japan has turned the corner economically. Nonetheless, on a valuation basis alone, I have been recommending a yen-hedged position in Japanese equities.

Whether or not the Yen plunges will have to do with Abenomics, and how Japan eventually handles (or doesn't) zero percent rates.  

Jensen's comment that US equities are "more or less fully priced" is silly. US equities are priced well beyond perfection in one of the biggest valuation bubbles in history.

Pension Fund Piling On

Jensen concludes with an interesting chart and comments about piling on.
Investors (well, most investors) continue to pile in to equities, as if they are the solution to their return challenge.

   

Pension funds are one example of such investors. If such pension funds have fixed obligations (called defined benefit plans in the UK), they currently struggle to generate the level of re turns they need to meet their obligations.

Even if there are good reasons to believe that the prolonged rally can continue for a little longer, there are equally good reasons to believe that the current equity bull market may end in tears. Such is the disconnect between stock valuations and economic fundamentals in some markets.
Disconnects

I agree with Jensen on Japanese equities, hedging the Yen, and the prospects of deflation in Europe.

The chart on asset allocations is particularly interesting. Investors are overweight equities just as they were were in 2000 and 2007, and I believe with dire consequences.

Jensen says "Statistically, equity markets fall 40-50% (as they did in 2008-09) only a couple of times in a life time, so why somebody is forecasting the next bloodbath to be around the corner is quite frankly beyond me."

It seems to me that equities plunged in 2000 and again in 2007. So that was twice in a seven year timespan. Given valuations are equally extreme now, caution is more than in order.

Japan prove stocks can stay depressed for decades. And that can happen again, someplace else, besides Japan.

Central Bank Action

I disagree with Jensen on the need for the ECB to do anything about falling prices. For discussion, please see Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit".

Inquiring minds may also wish to consider James Grant Conference Video: Inflation Expectations, Growth, Policy Problems; Europe Has Become Japan.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com  ]]>
11408360
http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11408359/european-service-prices-plunge-at-steepest-rate-since-january-2010-reflections-on-keynesian-stupidity Sat, 01 Nov 2014 16:09:35 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11408359/european-service-prices-plunge-at-steepest-rate-since-january-2010-reflections-on-keynesian-stupidity <![CDATA[European Service Prices Plunge at Steepest Rate Since January 2010; Reflections on Keynesian Stupidity]]> Markit Flash Eurozone PMI shows the steepest fall in output prices since the global crisis began. The PMI also shows renewed job losses in spite of an otherwise stable PMI.
The Eurozone saw a marginal upturn in growth of business activity in October, according to the flash PMI results. The headline Markit PMI ™ rose from September’s ten-month low of 52.0 to 52.2, signalling the first upturn in the pace of expansion for three months. However, the index remained below the average seen in the third quarter, and was the second-weakest reading seen so far this year.



Backlogs of work fell at the fastest rate since June of last year, dropping in both services and, to a lesser extent, manufacturing.

Service providers reported the first cut in payroll numbers since March, though manufacturers reported a slight upturn in employment. Prices were increasingly being cut in order to help boost sales. Average prices charged for goods and services showed the largest monthly fall since February 2010, having now fallen almost continually for just over two-and-a-half years. Charges for services fell at the steepest rate since January 2010 while a more modest decline was seen in the manufacturing sector, where prices fell only marginally and to a lesser extent than in September.

Price cuts occurred despite overall input costs rising in October, pointing to a further squeeze on operating margins. That said, manufacturing input prices fell for the second month running. Finally, business optimism about the year ahead in the service sector fell to the lo west since June of last year.

Markit Comments

"The Eurozone PMI rose in October but anyone just watching the headline number misses the darker picture painted by the survey’s other indices, which show the region teetering on the verge of another downturn. Growth of new orders slowed closer to stagnation and backlogs of work fell at a faster rate, causing employment to be cut for the first time in nearly a year. Business confidence in the service sector also slid to the lowest for over a year and prices charged fell at the fastest rate since the height of the global financial crisis, adding to an increasingly downbeat assessment of business conditions."

"While the survey suggest s the euro area has so far avoided a slide back into recession this year, a renewed downturn cannot be ruled out. Growth is so anemic that increasing numbers of companies are being forced into laying off staff and slashing prices in an attempt to cut costs and boost sales through discounting."

“The survey data are broadly consistent with GDP rising 0.25% in the third quarter, but unless demand picks up soon, growth could weaken again in the fourth quarter and deflationary forces could intensify."
My Comments

Prices received plunge the steepest since January 2010, but input prices are up. The latter is in spite of Brent crude dropping from 112 to 84-86 since June, and 98 to 84-86 since the end of September!

Rising wages in Germany help explain (see French Private Sector Output Falls at Sharpest Rate in Eight Months; Tale of Two Europes)

Isn't that what everyone wants? Yet competition for new business is so intense that "Prices were increasingly being cut in order to help boost sales."

Reflections on Keynesian Stupidity

Fancy that. Businesses are cutting prices to increase sales! Meanwhile Keynesian economists tell us that prices need to go up to increase sales.

Any business in Europe raising prices now would soon go out of business due to no sales at all.

And forget about the equally stupid Keynesian theory that consumers will hold off purchases when prices fall. They won't.

For discussion, please see Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com  ]]>
11408359
http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11407859/house-prices-real-prices-and-pricetorent-ratio-in-august Sat, 01 Nov 2014 12:50:34 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11407859/house-prices-real-prices-and-pricetorent-ratio-in-august <![CDATA[House Prices: Real Prices and Price-to-Rent Ratio in August]]> I started 2014 expecting a slowdown in year-over-year (YoY) house prices as "For Sale" inventory increases - and the price slowdown is very clear. The Case-Shiller Composite 20 index was up 5.6% YoY in August; the smallest YoY increase since October 2012 (the National index was up 5.1%, also the slowest YoY increase since October 2012.

This slowdown was expected by several key analysts, and I think it is good news.  As Zillow chief economist Stan Humphries said today:
“After several months in a row of slowing home value growth, it’s fair to say now the market has officially turned a corner and entered a new phase of the recovery. We’re transitioning away from a period of hot and bothered market activity, characterized by low inventory and rapid price growth, onto a more slow and steady trajectory, which is great news. In housing, boring is better."
emphasis added
Boring - in the housing market - would be good!

In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $280,000 today adjusted for inflation (40%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Nominal House Prices

Nominal House PricesThe first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through July) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to February 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to September 2004 levels, and the CoreLogic index (NSA) is back to February 2005.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to September 2002 levels, the Composite 20 index is back to June 2002, and the CoreLogic index back to March 2003.

In real terms, house prices are back to early '00s levels.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to February 2003 levels, the Composite 20 index is back to September 2002 levels, and the CoreLogic index is back to July 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to early 2000 levels - and maybe moving a little sideways now.

]]>
11407859
http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11407802/house-prices-real-prices-and-pricetorent-ratio-in-august Sat, 01 Nov 2014 12:40:34 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11407802/house-prices-real-prices-and-pricetorent-ratio-in-august <![CDATA[House Prices: Real Prices and Price-to-Rent Ratio in August]]> I started 2014 expecting a slowdown in year-over-year (YoY) house prices as "For Sale" inventory increases - and the price slowdown is very clear. The Case-Shiller Composite 20 index was up 5.6% YoY in August; the smallest YoY increase since October 2012 (the National index was up 5.1%, also the slowest YoY increase since October 2012.

This slowdown was expected by several key analysts, and I think it is good news.  As Zillow chief economist Stan Humphries said today:
“After several months in a row of slowing home value growth, it’s fair to say now the market has officially turned a corner and entered a new phase of the recovery. We’re transitioning away from a period of hot and bothered market activity, characterized by low inventory and rapid price growth, onto a more slow and steady trajectory, which is great news. In housing, boring is better."
emphasis added
Boring - in the housing market - would be good!

In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $280,000 today adjusted for inflation (40%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Nominal House Prices

Nominal House PricesThe first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through July) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to February 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to September 2004 levels, and the CoreLogic index (NSA) is back to February 2005.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to September 2002 levels, the Composite 20 index is back to June 2002, and the CoreLogic index back to March 2003.

In real terms, house prices are back to early '00s levels.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to February 2003 levels, the Composite 20 index is back to September 2002 levels, and the CoreLogic index is back to July 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to early 2000 levels - and maybe moving a little sideways now.

]]>
11407802