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While house price gains continue to go nuts, housing remains much more affordable than at the peak of the bubble

While house price gains continue to go nuts, housing remains much more affordable than at the peak of the bubble

The boom – and maybe insanity – in house price gains continued in February, as both the Case Shiller and FHFA house price indexes increased roughly 1% just since January! The YoY increase for both was almost exactly 12%, as shown in the graph below:


While the YoY increase in house prices matches those of the bubble peak, and are, to say the least, not sustainable, they aren’t quite the crisis that they appear at first glance. 

New home sales rise m/m, but signal caution for housing market going forward

New home sales rise m/m, but signal caution for housing market going forward

New home sales increased to a three month annualized high of 923,000 in January. This is of a piece with the positive news last week on housing permits. At the same time, the pace remains below the recent high of 979,000 annualized set six months ago in July. The below graph compares housing starts (blue) with the much less volatile single family permits (red) and the even more volatile, and heavily revised, new home sales (gold), normalized to 100 as of January 2020:



December inflation: real aggregate wages fall as real average wages rise due to compositional effects

December inflation: real aggregate wages fall as real average wages rise due to compositional effects

Consumer inflation typically rises as expansions continue, and declines once recessions start. Once a recovery begins, inflation typically steadies again. While the pandemic has affected both consumer demand and the supply chain, overall the paradigm should still apply. With that in mind, let’s take a look at December’s report.

For the past 40 years, recessions had typically happened when CPI less energy costs (red) had risen to close to or over 3%/year. As of this month, that number is exactly 2%: 


In other words, there is no troublesome price pressure outside of the pandemic. Because pandemic affects are probably influencing seasonality, I also show non-seasonally adjusted inflation below (red):