Re: CPI a fraud?


<royls@xxxxxxxxx> wrote in message
news:431f3cfa.14827630@xxxxxxxxxxxxxxxxxxxxxxxx
> On Wed, 07 Sep 2005 01:37:40 GMT, "Bill" <xxx@xxxxx> wrote:
>
>><royls@xxxxxxxxx> wrote in message
>>news:431e462f.37199971@xxxxxxxxxxxxxxxxxxxxxxxx
>>> On Tue, 06 Sep 2005 17:42:19 GMT, "Bill" <xxx@xxxxx> wrote:
>>>
>>>><royls@xxxxxxxxx> wrote in message
>>>>news:431de720.12861092@xxxxxxxxxxxxxxxxxxxxxxxx
>>>>> On Tue, 06 Sep 2005 06:11:31 GMT, "Bill" <xxx@xxxxx> wrote:
>>>>What would be an
>>>>outline of a better way
>>>
>>> No hedonics, for one. Focus on standard items for another: a gallon
>>> of gas, a loaf of bread, etc.
>>
>>We are talking about how to compute the cost of housing in the CPI other
>>than
>>using rent. You claimed there was a better way and I asked you to outline
>>it.
>
> First of all, for imputed rent the CPI does not use actual rent, but
> homeowners' _estimates_ of what their places would rent for. Such
> estimates are subject to all sorts of inaccuracies and systematic
> biases, in addition to the disconnect between rental and purchase
> costs described below.
>
> Secondly, the "hedonic pricing adjustment" is essentially just
> subjective opinion, and should be eliminated. Applying a hedonic
> depreciation factor to improvements without accounting for both actual
> rent and increases in land rent is not measuring housing price changes
> in any meaningful way.
>
> So at a minimum, the CPI should use actual house prices and mortgage
> payments rather than estimated rents.
>

As best I can understand it, they have gone back to using actual rental costs
and try to attribute these measuared rental costs to purchased house prices.

http://www.bls.gov/cpi/cpifact6.htm

"In 1997, BLS started the process of developing a new housing sample to
replace the one that had been in use since 1987, and began using it starting
with the index for January 1999. BLS dropped the owner sample and returned to
the method that was used for the rental equivalence index when it was first
introduced, that is, reweighting the renter sample to represent owner-occupied
units."

Bill

>>>>>>Also as
>>>>>>the cost of rents to the rentors goes up, the CPI goes up.
>>>>>
>>>>> If imputed rents go up in the absence of any investment in
>>>>> improvements (i.e., if land rent increases), it is _assumed_ that
>>>>> there is a "hedonic" improvement, and the land rent increase is
>>>>> _subtracted_ from the consumer price basket rather than being added to
>>>>> it.
>>>>
>>>>That makes no sense.
>>>
>>> I'm not the one doing it.
>>
>>I'm saying what you said makes no sense. In what way is the land rent
>>increase
>>subtracted from the consumer price basket?
>
> Sorry, I got that wrong, above. The hedonic adjustment is for age of
> improvements, regardless of whether there is any increase in actual
> rent. The subtraction of land rent has a different mechanism.
>
> Because people treat housing as an investment, prices depend on
> potential income yield vs prevailing interest rates. And because real
> estate investors are often willing to slowly pay off capitalized land
> rent out of their own resources in order to acquire the asset, they
> often just have tenants effectively to finance their land purchases
> (paying only for maintenance, depreciation and the mortgage interest
> while the investor pays for the land). So actual housing rents do not
> reflect real land rents. Increasing residential land rent stimulates
> speculative investment in housing, which tends to hold actual (and
> estimated) rents down even while land costs are skyrocketing. This
> should eventually correct itself as interest rates rise and
> speculative bubbles pop, but in the meantime it is very deceptive.
>
>>>>What you are saying is that if rent goes up in the
>>>>absence of improvements then it is assumed land rent is subtraced from the
>>>>CPI. Why?
>>>
>>> To reduce both the officially acknowledged rate of general price
>>> increases (especially of assets) and the officially acknowledged
>>> aggregate rent of land.
>>
>>So you are saying this is for conspiratoraial reasons.
>
> Governments often falsify economic data for "conspiratorial" reasons.
> The same sort of thing was done (by a different mechanism) in Japan,
> where stock prices were doubling and tripling, land prices quadrupling
> and quintupling, but the CPI stayed stuck at 1% or 2% a year through
> the 80s. Are you perhaps unaware that energy costs were taken out of
> the US CPI just about the time oil prices started a long-term rising
> trend? Is that the way to measure general price trends?
>
>>What is the mechanism -
>>arthimetically - they use to do this?
>
> Among other ways, they do it by using estimated residential rent
> rather than actual housing cost or mortgage payment.
>
>>>>>>But if someone
>>>>>>buys a new place, the price of land is reflected in their cost and they
>>>>>>will
>>>>>>attempt to recover that.
>>>>>
>>>>> And if someone owns an old place long paid for, they will attempt to
>>>>> "recover" the price the land _would_ fetch if it were sold today. So
>>>>> what?
>>>>
>>>>So as the price of land goes up, rents will increase and the CPI will go
>>>>up.
>>>
>>> Nope. Imputed rents (which account for 2/3 of the housing component
>>> of the CPI) are not calculated based on the price of land.
>>
>>Right they are based on actual rents from a survey. Correct?
>
> No, AFAIK for the 2/3 that is imputed rent, they ask homeowners what
> they think their places would rent for.
>
>>There is no
>>direct association to the cost of land - which was the point of my first
>>post
>>in this thread.
>
> True.
>
>>However, if the price of land goes up eventually at least some
>>of that will be reflected in rental costs.
>
> Maybe eventually, but in the meantime the numbers can get quite out of
> whack, as we currently see in the USA, where general liivng costs are
> rising rapidly, but the official consumer price number stays low.
>
> -- Roy L


.

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