If you’re an economist, what I’m about to say will come as no news to you.

Our government is responsible for high housing prices.

How so? Well, I, with my 12th-grade education, will explain it to you.

What makes interest rates go up or down? The Federal Reserve. (Sorry, economists, I’m not going to explain all the minutiae of our federal banking system, here.)

The Fed is interested in the rate of inflation. Or, unnaturally obsessed with the rate of inflation, depending on what type of economist you are.

One measure of inflation is the Consumer Price Index.

The Consumer Price Index (CPI), is, as we all know, a statistical measure of a weighted average of prices of a specified set of goods and services purchased by wage earners in urban areas. It is a price index which blah, blah, blah, blah, blah.

Let me put it this way: the government looks at a “basket” of goods and services each month, and decides whether or not people are paying more for the same items. Like a raincoat. Or a new car. Or a package of Little Debbies. Mmmm.

If it looks as though we’re paying more for the same things (like, if the cost of gasoline goes up, or the price of a package of Little Debbies), then The Fed will raise interest rates. If everyone’s out of work, and Little Debbie factories are closing down, then The Fed will lower interest rates, so that businesses will borrow more money, hire more workers, and make more snackcakes.

But, it’s an imperfect science.

For one thing, the Consumer Price Index does not measure fluctuations in housing prices.

Rather, the Bureau of Labor Statistics relies on a survey of 6,000 rental properties in representative neighborhoods to determine the cost of living in a home.

Rent, in effect, becomes a proxy for the monthly cost of home ownership. What homes sell for plays no role.

Yeah, you read that right.

The CPI ignored rising home prices over the past six years. The CPI looked only at rents, which, because everyone was buying homes, actually went down.

Which meant that The Fed thought inflation was under control.

Which is why they kept lowering interest rates.

Which is why home prices kept going up. (Due to demand outstripping supply.)

Now, however, as interest rates rise, less people can afford to buy, and more people look to rent.

Which is why rents are going up. (Due to demand outstripping supply.)

Which raises CPI.

Which causes the Fed to raise interest rates.

Which causes more people to rent, versus buy.

Etc.

As one economist put it: It’s a quirky way of measuring the cost of shelter, Mr. Glassman said, at a time when home prices are going down and most mortgage payments are fixed.

Quirky, my ass. Stupid, is more like it!

(* Of course, you could argue that rents are more accurate than mortgage loans, since the majority of mortgage loans are fixed-rate, so monthly housing expenses aren’t going up for most people. You could argue that, but please don’t.)

(* Of course, you could also argue that the federal government is responsible for higher housing prices, by running a deficit, each year. Yes, you could argue that.)

(* Okay, economists, I’m as smart as you are. Yes, I realize you can argue that the government is responsible for lower housing prices, through the creation of Freddie Mac and Fannie Mae. Yeah, I know that. Don’t go all Sir John Richard Hicks on me.)

Inflation Gives Signs of Slowing – By Louis Uchitelle, The New York Times

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Updated: January 2018

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