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.

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Mike "Mish" Shedlock

Comments (18)
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The price data is what it is. Just stick to the facts.


Shamrock, you are correct that the drop in interest rates accounts for most of the rise in prices. Eventually rates will rise again, at which point prices obviously will fall. Some people call the rise of prices as rates fall "a bubble" and the fall in prices that accompanies rising rates as "popping the bubble". It's all terminology. Thus, you can say "No bubble", and you can call it something else, if you prefer, but we all agree on the core facts, which is that falling rates drive home prices higher, while rising rates drive them lower.


One other factor drives homes higher, it the govt subsidy to homeowners, i.e. tax break on interest. This gives the illusion that you are getting a break but in reality it has helped drive prices up. Its really a gift to the builders.


I think I read Robert Shiller from Yale say something like for the past 150 yrs house prices have risen at about the rate of inflation. And he said that prices were currently 35% above that. So that means a 35% correction if there is a reversion to the mean.

There is no question historic low rates are the only thing that has allowed home prices to outpace incomes by so much. Thus keeping the payment down, which is what matters to home owners. Also, the last 5 years or so has seen a ton of foreign Chinese buying. That likely has a something to do with prices so high on the coasts.