Comparing the Minnesota Home Price Index to Inflation, are we at the bottom? Case Shiller, FHFA, and CPI


I pulled some stats from the St Louis Federal Reserve to see how real estate performs with inflation over time.  The result of this is not what I was expecting.  I wanted to show that home prices pace inflation proving it is a nice hedge against inflation.  That is true, however what I discovered is a little more interesting.

click to enlarge

The blue line is CPI, Core Inflation while the Red Line is FHFA’s Minnesota Home Price Index.  Up until the mid 1990’s the home price index tracked just above the CPI, just like I expected.  What I couldn’t help noticing is this Giant Bubble…  Home Prices are still approx 17% apart as of April 2011 (the latest Home Price Index on this chart).  We have dropped even closer since, so our spread is probably closer to 10% now, within negotiating terms.  Sellers are receiving approx 92% of their asking price now.  We are fairly close to the bottom when you look at it in those terms,  within 10% assuming the market doesn’t over-correct…

Going forward I believe we are going to see high inflation like we did in the later 1970’s and early 1980’s, probably more so.  (see Monetary Base chart from earlier post).   If inflation kicks in and home prices find their equilibrium with CPI again, the future may look something below (maybe with a few more peaks and valleys..):

Just a Guess at the Future

Interestingly enough, I spent some time downloading the CPI into excel and running that up against Case Shiller’s Index.  These are indexed at different reference points, so we are only really trying to gauge the separation between them not the actual index value.  The Case Shiller Index suggests to me that we are at bottom when compared to CPI, or at least very close to.  The Minneapolis Case Shiller Index is updated as of July 2011, probably more accurate than April 2011 from the FHFA Home Price Index…

What’s your prediction?  Care to take a guess?  Do you think we will over-correct first?  It is still anyone’s guess at this point…

Inventory has come down, rates are record lows, affordability all time high, rents increasing…  the only thing missing is jobs.

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2 Comments

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2 responses to “Comparing the Minnesota Home Price Index to Inflation, are we at the bottom? Case Shiller, FHFA, and CPI

  1. Anonymous

    Yes, but you are erroneous in one regard. Why does housing have to follow along inflation?

    It would be rents that drive the price of property. In otherwords housing doesn’t “have to” drop down to inflation. I would have htought housing over the long run would beat out inflation. In this sense, housing could be pretty fairly valued. Based on my price to rents, Minnesota has come back to normal valued levels. Of course when you account for taxes, I think it still has another 10-15% to go.

    • Great point, yes price to rents is the true measure- and rents are coming up locally, which will put pressure on pricing. That is an indication we are getting close to the bottom.
      Taxes are going up even further, which won’t help pricing out at all… So 10-15%, you might be right – Time will tell.

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