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  1. #1
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    Default Slowing US housing market may stir inflation

    Hi Guys

    Article from tomorrow morning's NZ Herald:

    Slowing US housing market may stir inflation

    06.09.2004 - 4.00pm
    NEW YORK - As US home purchases slow, an expected rise in demand for rentals will result in a spike in inflation, analysts say, citing studies showing housing costs have been under-reported by the government.

    The concern about a sudden gain in inflation centres on how much the record low interest rates have fuelled the housing market since the economy softened dramatically nearly four years ago and how the rental market has softened as a consequence of so much home buying.

    The worry now is that as the economy regains its footing and rates rise to keep inflation in check, would-be home buyers will instead look in the rental market.

    All these concerns relate to the government's broadest inflation gauge, the consumer price index, which some analysts say has understated the true cost of housing because it more closely analyses rents as opposed to home purchase prices.

    "It's clear to me that the reported CPI (housing) metric is artificially restrained," said Richard DeKaser, chief economist at National City Corp. in Cleveland, Ohio.

    Housing costs -- a reflection of what the CPI survey refers to as "owners' equivalent rent," make up 25 per cent of the CPI and are the index's biggest component.

    But in the second quarter, home prices rose by 9.36 per cent, or more than 3.5 times the 2.6 per cent year-on-year increase of the CPI's owners' equivalent rent as of June 30, according to US government data.

    To complicate matters further, the rental-market bias of the government's CPI survey will haunt inflation forecasters in an entirely new way as greater demand starts pushing up rents.

    In other words, as rising interest rates help cool the housing market and the rents start heating up, inflation, as measured by the CPI, will go from being understated to being overstated.

    On the surface, such talk about the CPI appears academic. But even modest variance in the CPI can have notable impact on the economy because the US government adjusts Social Security and certain debt interest payments based on the CPI. Some wage contracts also tie salary increases to the CPI.

    The CPI's "rental-equivalence" index gauges how much homeowners would charge themselves for living in their own homes.

    Using this formula, CPI inflation was understated by more than 1 percentage point annually in 2002 and 2003, according to Joseph Carson, director of global economic research at AllianceBerstein in New York, in a study released last week.

    Given this approach to gauge housing inflation, Carson worries that the Federal Reserve's current monetary policy may not be doing enough to contain inflation.

    "Most seriously, in our view, it is resulting in the Federal Reserve holding interest rates too low for too long," he said in the report.

    However, the core personal consumption expenditure (PCE) index, the Fed's preferred inflation measure, was unchanged in July versus June and was up 1.5 per cent from a year ago -- a relatively tepid reading that might support the Fed's current policy of hiking rates in a "measured" way.

    Last week, government and industry data showed that sales of new homes and existing homes fell 6.4 per cent and 2.9 per cent, respectively, in July.

    It is unclear how soon and how strongly rents will rebound, given the historically high level of apartment vacancies, analysts said. Some analysts fear that when rents do start rising, the CPI would be skewed, overstating inflation, rather understating it.

    The latest CPI data for July show CPI owners' equivalent rent was running merely 2.5 per cent higher than a year earlier, below the overall CPI inflation rate of 3.0 per cent.

    Average US home prices were up 7.7 per cent in the second quarter from the same quarter in 2003, according to the Office of Housing Enterprise Oversight.

    The housing market has been stubbornly strong, even with the modest rise in mortgage rates this year. But this torrid pace of home appreciation cannot be sustained as mortgage rates rise, leading to fewer people eligible to borrow and buy homes, analysts caution.

    "It's not likely to continue with rising interest rates. The affordability of homeownership diminishes," said National City Corp.'s DeKaser.

    - REUTERS
    Link is http://www.nzherald.co.nz/storydispl...toryid=3589440

    Regards
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  2. #2
    Join Date
    May 2004
    Location
    Manawatu
    Posts
    242

    Default

    Well I am impressed.... This article is in tomorrows herald???

    Hey Muppet can you tell me what the Lotto numbers are for Saturday????

    Please!!!!

    Jokes aside it does seem that our own rents ets are running in a similar fashion..

  3. #3
    Join Date
    Sep 2003
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    High up above and deep down under
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    Default

    Hi Janesco

    Most impressive wasn't it.

    Actually it was posted on the NZ Herald web site at 4pm in the afternoon. This indicated that it was going to appear in the next day's paper, hence my introduction.

    Now for next Saturday's Lotto numbers... let me think.... ahhhhh, now I have them.....I'll post them on Sunday morning to see how good I am.

    Regards
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  4. #4
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    May 2004
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    Manawatu
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    242

    Default

    Rats

  5. #5
    Join Date
    May 2004
    Location
    Auckland
    Posts
    168

    Default

    It was on bloomberg.com a day or two ago


 

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