There is a tendency, well, everywhere, to throw numbers
in the face of friend and foe alike, generally in an attempt to produce that
silent, “
man,
you-are-totally-right-and-I-will-never-doubt-you-again” response. Not that
it actually happens anyhow. What I’m saying is that numbers tend to demand
respect without being qualified. And any chance I can aid in adding clarity to
a figure or concept is always a fair excuse to elaborate:
The Consumer Price Index, or CPI, is one of the most
loaded figures invented by man. The paradox here is that peoples’ past
consumption decisions determine the metric’s current output (demand pull or
cost push), and based on that output, people have a tendency to change their future
decisions because of it. Or we can just call it what it is: past behavior is a predictor of future
behavior.
Visually illustrated:
Distinction is the reason one studies philosophy:
There are two separate housing-components within the CPI
index—the common conception of what it is, and the ‘Owners Equivalent Rent’
(OER).
The dirty secret here is that the CPI does not track home prices per se,
because the OER concept is really just a proxy.
This portion that makes up nearly one-fourth of the index
value is an answer to the question: “If
someone were to rent your home today, how much do you think it would rent for
monthly, unfurnished and without utilities?” You should be asking your agent this question so you have a better idea
at arriving at the appropriate negotiation value for your home (future blog
to elaborate).
I want to make one more argument. See the following
chart:
Major premise: The Home Price Index (HPI) is the
nominally appraised market value of a property. This is what willing buyers and
sellers agree upon. Nationally speaking, this is what drives the perception of
the “housing market.”
Minor premise: The Owners’ Equivalent Rent, which we
acknowledge has limitations, represents the rent-demand pricing power built
within an existing home. The increase in home qualification standards, supply
constraints, and the change in existing home owner behavior has justifiably
increased the fundamental case to
establish a floor price on home values.
Argument: the OER specific to one’s region is the
qualification number to the CPI. This is the equivalent of the earnings power
rising for a company over time. As long as the OER shows strength over time,
and it has, then the nominal price of a home will eventually reflect that
intrinsic value.