The CPI

Since 1983 the Federal Government has excluded housing prices from the Consumer Price Index (CPI) its broad measure of inflation.

The stated logic behind this exclusion is that the price of housing consists of two components; the value of a house as shelter and its value as an investment.  Since the CPI is designed to exclude investments, the price of housing was removed and replaced with a metric known as Owners’ Equivalent Rent. 

The Federal Government, The Department of Labor and The Bureau of Labor Statistics are factually wrong in excluding housing prices from the inflation measure, but their stated logic for the decision is interesting.

Housing as an Investment

A home’s price does consist of discreet value components.  This excerpt from The Affordable Mortgage Depression Manifesto summarizes the dynamic succinctly and illustrates the central importance of the investment component in the context of the Housing Bubble and its ongoing Collapse:

“There are two discreet components to the value of a house which affect price.  These include the value of a house as shelter and as an investment.  The investment value is the component of housing prices which skyrocketed during the boom and is evaporating during the bust.  The value of shelter is relatively static and related to income and relative rents.  The investment value will continue to fall year after year until foreclosures are no longer happening in material numbers, credit isn’t restricted, buyers don’t expect real estate to continue to fall and inventories of houses for sale aren’t above historical norms.  As long as expectations are negative and risk is high relative to fundamental value, prices are unlikely to stabilize until they approach the value of homes as shelter.”

While the investment component has always been present in home purchases, its relative share of the market price has expanded dramatically in recent years.  The Government through its own assertions has clearly established a firm grasp of this reality.

The Conundrum

One arm of the Federal Government has correctly argued that there is a large, material and growing investment component intrinsic to the price of a house.

But if housing is predominately an investment, why is the Federal Government compensating citizens to invest in these risky, volatile assets at direct cost to taxpayers?  Fannie Mae, Freddie Mac, HUD, FHA and Congress have and continue to actively subsidize Homeownership on a massive scale. 

• First time Homeownership programs are available to any new buyer (which presently include an $8,000 tax credit)
• GSEs have been subsidizing mortgage rates with taxpayer money and through the assumption of undue risk for decades
• The Federal Reserve is presently subsidizing mortgage rates near historic lows with open-market purchases of mortgage securities paid for with newly printed money
• The Origins of the Housing Bubble (which includes the Riegal-Neal Act, revision of the Community Reinvestment Act and HUD’s directing of Fannie/Freddie to spend hundreds of billions of dollars on subprime loans) were all designed to extend Government subsidized Homeownership to the masses

Why the Government’s Homeownership Obsession has Nothing to do with Shelter

Shelter in the form of rentable apartments and houses are plentiful and relatively affordable.  If the Government were interested in helping Americans obtain such shelter, it would assist renters with similar zeal to that directed towards Homeownership.  There are low-income rental assistance programs, but they are immaterial relative to the scale of Homeownership initiatives and aid only a small minority of the population.

A Perspective on Subsidized Homeownership

The stark reality is that the Government is consciously subsidizing speculative investments with taxpayer resources.  Politicians might as well be paying investors to purchase stocks or pork bellies while committing taxpayers to cover any losses resulting from bear markets and bacon gluts.

From a strictly financial perspective, homeowner subsidization is the functionally cost equivalent of the Government directly paying renters who have chosen to only purchase shelter by foregoing an investment in speculative real estate.  Frankly, such a structure would be far more efficient in assisting those who were the intended beneficiaries of subprime loans and who are also disproportionately renters.  Of course such a direct transaction would not be politically feasible.  (At least not historically) 

Government subsidized Homeownership is nothing more than paying people to execute leveraged buy-outs of overvalued assets with the taxpayers exposed to the downside risk. 

Even worse, this overt effort to redistribute wealth has produced exactly the opposite result. 

• The prices of homes have never been less affordable in history than during recent years, all but eliminating responsible first-time and low-income homebuyers from the market
• Many of those who accessed Government subsidized mortgage products have been wiped out financially and face either bankruptcy or foreclosure 
• The highest unemployment rates in a generation, directly resulting from the Government manufactured Housing Bubble, will do far more damage to the poor and the middle class than all of the make-believe benefits of unsustainable Homeownership combined 
• The damage to the credit markets, increased risk associated with housing assets and the inevitability of higher interest rates may impair access to Homeownership for decades

With the understanding that today’s houses are largely financial investments, the Government’s ongoing efforts to prop up the housing market amount to an attempt to fix the prices of asset values.  The Government might as well reset the DOW back to 10,000 or at least prevent any further declines with $8,000 tax credits to purchase stocks, margin-call moratoriums and subsidized loans to equity investors.