Friday, June 13, 2008

Case-Shiller Price Index

Owner's Equivalent Rent "OER" makes up 23.942% of CPI by weight. While OER makes sense for the "average" person out there, for a person like me with the following characteristics it does not:

  • I am an individual
  • I am self-serving
  • I do not own a home
  • I have wanted / would like to own a home
  • I will likely soon buy a home
As such, CPI has understated my inflation during the housing boom and is now overstating my inflation due to the massive decline in home prices. To better illustrate the point I've gone ahead and tweaked CPI to create the Case-Shiller Price Index "CSPI".

How you may ask did I create this index? I took reported YoY CPI and backed out the YoY change in U.S. Housing CPI at the 23.942% weighting. I then took this result and added the YoY change in the Case-Shiller Home Price Index at that same weight.

The result? While it ignores things like the increased financing costs associated with a home purchase, the CSPI shows inflation is not as bad for an "average person" looking to purchase a home. It will be interesting to see how this reacts when home prices finally hit a floor. Stay tuned...