Housing Bubble and Everything Bubble in One Simple Picture

To understand the magnitude of the housing bubbles simply compare the index of wages to the index of prices.

How Did We Get Here?

That's easy.

Average Wages vs CPI

Note the correct CPU comparison for this chart is CPI-W not CPI-U, not that it matters much.

No matter what official CPI one uses, the chart is a joke. Why? The CPI only reflects rent, not actual housing prices.

The Fed made this mistake during the housing bubble and they made it again from 2011 to present.

More bubbles will burts and that is very deflationary. By chasing its tail, the Fed creates the very conditions it seeks to prevent.

Price Deflation Not a Problem

For years, the Fed desperately sought more inflation. However, a BIS Study on the Historical Costs of Deflation shows routine price deflation is not a problem.

According to the BIS, “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.”

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

Meanwhile, people keep faith in the Phillips' Curve. It's pathetic.

Related Articles

  1. Housing Liquidity Crisis Coming: Debt Deflation Follows
  2. Fed Study Shows Phillips Curve Is Useless: Admitting the Obvious
  3. How the Fed's Inflation Policies Crucify Workers in Pictures

Mike "Mish" Shedlock

Comments
No. 1-18
cecilhenry
cecilhenry

And Canada is FAR worse than this. YET it persists and grows for 15 years~!!!!!!!

hmk
hmk

Yet no one questions the king even though it is obvious he has no clothes. The only beneficiary of inflation is for those who are indebted. The biggest is the US government and that is why the numbers are deliberately misstated by our benevolent dear leaders.

shamrock
shamrock

All of your stories on home prices always omit the interest rate, which is typically more than the principal. It looks like median new home prices have doubled from 100 to 200 since 2000, but taking in to account mortgage rates of 8.3% in Jan 2000 and 4.3% in Jan 2018, the total 30 year cost of a $100 house in 2000 was $271, compared to a total cost of $356 in 2018. An increase of only 31% over 18 years. That's not even accounting for the fact that median new home size is up significantly as well, so you're getting a lot more house for not a lot more money. No bubble.

MntGoat
MntGoat

It will be interesting what gives in USA housing this time. Home prices and rents have grown much faster then incomes. But home inventory is the lowest since they started keeping records in 1982. New home building this whole recovery has been way below historic averages. Especially entry level homes & apartments.

The next decade the millennials will form a lot of households driving demand for housing. Yet there is very little affordable housing. Affordable housing supply (apartments or homes) can't be added easily due to labor shortages, high land prices, permit costs, materials costs.

I think the expensive coasts and some other bubbly areas could see a healthy house price decline in a recession. But I do not see a big national housing downturn like 2008. Supply is low and loans more solid.