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.
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..):
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.
- Case Shiller Index: Twin Cities map comparison to the nation. (craigkamman.wordpress.com)
- Case-Shiller Home Price Index Down 4.1% From A Year Ago, Economists Expected Worse (businessinsider.com)
- Case-Shiller Index – Minneapolis Posts 10.8% Annual Decline in Home Prices through June 2011 – Leads Nation Again (johnmurphyreports.com)
- Case-Shiller Index: Seasonal Improvement, Minneapolis Declined by 9.1% Year over Year (johnmurphyreports.com)
- S&P Case Shiller Home Price Index 2nd Qtr 2011, Minneapolis vs Composite 20 (craigkamman.wordpress.com)
- Case-Shiller Home Price Index, July, 2011 (hofmanonhomes.com)