Tuesday, December 30, 2008

The Case-Shiller index, inflation corrected

One might want to consider correcting the Case-Shiller (CS) indices for different measures of "inflation". There are of course many different measures of inflation: consumer price inflation, commodity inflation, asset inflation and wage inflation. The plot above is the CS corrected for the most common measure of consumer price inflation, CPI-U. It might be argued that over the long run, house prices should be fairly stable in "real" inflation adjusted dollars. This would imply that the prices above should revert to the average real value at the end of this cycle and so this provides some predictive value. Similarly, it could be argued that a better way of correcting the CS, would be to use wage inflation. It is after all, wages that are used to service mortgages. If wages do not increase, it is hard to see how people can pay for more expensive housing costs. Basically, real median household wages have been flat to slightly down since 1999. They are about 10% higher now than 1986.

Another argument can be made that rent prices are the right thing to compare house prices to. People either need to buy or rent and so the supply and demand for each as well as the supply of people should determine house prices. We will consider these alternative "inflation" measures in future posts.


Edward said...

Thank you. I would be very interested in seeing graphs adjusted for each various indexes you mentioned. I'm particularly interested in the "vs. wages" and "vs. rent" adjustments. I'm in south Florida and looking to buy but NOT NOW!

Networking said...


I still haven't figured why the 4 largest MSA in the USA (Philly) does not figure in this index. In 2008, Pittsburgh home price increased a modest 1%. Most of Pennsylvania,while we are affected, has an extremely moderate housing downturn. While unintentional, Case-Shiller overstates the housing problem as it includes all the bubble real estate markets but none of the moderation cities.

Another example is Raleigh versus Charlotte. Charlotte has two of US's top 10 banks. It is going to look bad in Charlotte now. But Raleigh real estate market is up slightly.