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Inflation Inaccurately Measures Homebuyers’ Pain

To measure housing-cost inflation, the Consumer Price Index uses “the current cost to rent the house you own,” even though many mortgage payments won’t change.

NEW YORK – The U.S. Bureau of Labor Statistics, which compiles the Consumer Price Index (CPI), doesn’t measure the cost of homeownership within home prices. Instead, it estimates what a homeowner would pay to rent their own house.

That means this “owners’ equivalent rent” tends to track rents rather than houses, and it’s up 17% since the start of 2021.

However, that number used for gauging inflation doesn’t mean anything to homebuyers actually in the market. They care mainly about the price of the home and the current mortgage interest rate.

Since January 2021, home prices – despite a late 2022 dip – have risen 29%, according to the S&P/Case-Shiller national home price index, and mortgage rates have nearly tripled. The buyer of the typical home thus faces a monthly principal and interest payment of nearly $2,200, or more than double the level of early 2021, the National Association of Realtors calculates.

This may explain why the net share of consumers saying “it’s a good time to buy a home” has hits its lowest point since 1982 in the University of Michigan’s monthly sentiment study.

For buyers, a home affects decisions about marriage, children, career and where to live. Less than 1% of households in any given month will buy a house.

But 17% plan to buy a home in the next 12 months, and more want to buy their first house or trade up but cannot afford to do so.

As of yet, economic challenges haven’t made a dent in homeownership rates compared to pre-pandemic times. The rate is higher among almost all age groups, according to the Census Bureau.

Source: Wall Street Journal (11/15/23) Ip, Greg

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