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Jacob Pass 

Fast-rising housing costs have helped to push inflation to a 13-year high. But the way that government statisticians track the price of consumer goods may be missing just how explosive home-price growth has been in recent months.

Housing costs rose by 0.4% between April and May, according to the latest edition of the monthly consumer price index released Thursday by the Bureau of Labor Statistics. Compared with last year, housing prices were up 2.2%.

Altogether, the rise in housing prices accounted for over a quarter of the overall increase in inflation in May, a reflection of how heavily government economists weight this spending category.

But if that 2.2% figure seems off based on your own experience of buying or selling a home, it’s not a surprise. Not everyone agrees on the rate of house-price growth.

The latest edition of the consumer price index indicated housing prices have risen 2.2% over the past year, while other reports suggest home prices are up more than 13%.

Other data suggested a much faster pace of home price appreciation well in excess of that level.

In the greater Seattle area for example, The NWMLS report for May shows year-over-year price increases measured by percentages appeared to hit a new high with the median price on last month’s 9,374 closed sales soaring 30% from a year ago.

A check of Northwest MLS data shows prices on the 8,011 single family home sales (excluding condos) that closed last month sold for 107.3% of the asking price. In the 4-county Puget Sound region (King, Snohomish, Pierce and Kitsap), the figure was 108.6%, while in King County it was 109.5%.

Closed sales jumped nearly 42% from a year ago. Prices on last month’s closed sales of single-family homes and condos (combined) represented a gain of more than 23%.

Pending sales of condos in King County surged 62.4% from a year ago. In Seattle, last month’s pending sales shot up 83.7%, while area-wide, they rose 37.2%.

Closed sales of condos system-wide more than doubled from a year ago, from 658 to 1,363 (up more than 107%). Prices on last month’s sales increased 21.7% from last year, with the largest gains outside of King County.

Housing Crisis 2021: Lack of Inventory

The most recent report from the Case-Shiller Home Price Index for March showed that home prices were up more than 13%, the largest rate of growth since 2005.

So how does the CPI calculate housing? Firstly, housing units themselves are not included the CPI market basket.

Secondly, rental data to establish how prices are changing are collected every six months. The calculations for most other CPI items are collected monthly or bimonthly.

“Like most other economic series, the CPI views housing units as capital (or investment) goods and not as consumption items,” the Bureau of Labor Statistics says. “Spending to purchase and improve houses and other housing units is investment and not consumption.”

“The cost of shelter for renter-occupied housing is rent. For an owner-occupied unit, the cost of shelter is the implicit rent that owner occupants would have to pay if they were renting their homes,” it adds.

The government pollsters ask homeowners: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

And they ask renters: “What is the rental charge to your [household] for this unit including any extra charges for garage and parking facilities? Do not include direct payments by local, state, or federal agencies. What period of time does this cover?”

Housing isn’t like other goods.

“The rate of house price appreciation is not akin to inflation,” said Mark Fleming, chief economist at title insurance company First American Financial Services FAF.

For a start, housing is a very basic necessity. “Demand for shelter doesn’t go away — it just moves around,” Fleming said. In other words, if the price of airfares skyrockets 7%, as it did over the past month, families could decide against going on that summer getaway.

That choice isn’t so simple when it comes to housing. As the cost of shelter increases it can have a “cascading effect on extremely low-income families and individuals,” said Andrew Aurand, vice president for research at the National Low Income Housing Coalition.

Many of these households spend upwards of 50% on housing, leaving little money behind for other purchases.

The alternative for these households would be losing the roof over their heads.

Meanwhile, for people who own their homes, buying a property isn’t the same as buying, say, a banana. Owning that banana won’t benefit you financially in the long run, whereas with a house you can expect to see its value increase and to profit off that. But a home isn’t a pure investment asset like a stock — it’s a mix of both.

Home prices can rise both because the actual structure itself may be worth more — thanks to the rising cost of labor and lumber — but also because people see value in it as a capital investment.

As a result, there can be a mismatch in the way economists or government statistician view rising home prices, and what that means to a consumer.

“In a market environment where prices are rising so quickly to buy a home the economist would say that’s the increase in the price of the capital good,” said Robert Dietz, chief economist at the National Association of Home Builders. “But to the buyer, it represents a higher cost of living.”

Why housing inflation is different.

People experience inflation vis-à-vis housing differently to most other products, and that makes it a challenging to measure.

For the typical homeowner, their housing costs likely haven’t changed too much over the past year.

“If you have a fixed mortgage, on your home, year over year, how much does your cost of living in that home change? Not very much,” Fleming said. “The only things that change year over year are your escrows for taxes and insurance.”

Even with renters, the price of housing doesn’t shift higher or lower from month to month. That’s why the Bureau of Labor Statistics collects housing data more infrequently than most other items in the CPI basket of goods.

For renters and buyers, you encounter the changing cost when something about your living arrangement changed: When you move to a new home, sign a new lease or refinance your mortgage.


Americans need to know how much housing costs are rising or falling — not the least of which because residential real-estate makes up such a huge portion of the nation’s economy.

The government’s Consumer Price Index calculates the “imputed rent” — essentially the amount a homeowner is paying for their housing rather than paying a landlord.

If it did not do so, GDP would actually fall, Dietz said, “because money that would be a rental payment in the marketplace paid by a renter suddenly disappears.”

To bridge this challenge, the government relies on survey data to produce its estimates of housing costs for renters and homeowners. In renters’ cases, they are simply asked how much they pay for housing.

But owners aren’t asked what their mortgage payment is — after all, not everyone has a mortgage. Instead, that’s why they are asked to estimate how much they would be able to charge for rent to lease out their current home.

Government statisticians survey the same cohort of Americans periodically to produce their findings and track changes over time to estimate housing costs.

“Inflation and [changes in] housing prices have generally been matched up,” said Jonathan Needell, President and Chief Investment Officer of KIMC, a private real-estate investment company. He added that rising housing prices has “exceeded inflation in some circumstances.”

Some researchers have argued, however, that this approach can also understate and/or be slow to identify true inflation occurring in the housing market.

A new analysis from Fannie Mae showed that there is typically a lag between when home prices are actually rising, and when that price growth is reflected in inflation reports like the consumer price index.

The role played by COVID-19.

The shifts in housing preferences and needs caused by the COVID-19 pandemic has also complicated our ability to gauge the effect of inflation in the housing market.

Why There is No Need to Fear a Housing Bubble


Wealthier Americans, many of whom suddenly found themselves able to work remotely, chose to move away from major cities into larger and cheaper homes in the suburbs, often saving money in the process. As a result, rental rates declined in pricier neighborhoods.

But in more affordable areas, rents actually increased. Americans who lost their jobs because of the pandemic rushed to find cheaper housing, pushing rents higher for the least expensive apartments and homes in the suburbs.

Those effects are beginning to dissipate but will continue to weigh on official measures like the consumer price index given the time lags that occur.

So, is housing quickly becoming more expensive? The answer, economists agree, is yes. First American Financial Services has its own measure, the Real House Price Index, which compares nominal-price gains with Americans’ ability to afford to purchase a property based on the prevailing interest rates and household income.

For a period of time between 2018 and the beginning of 2020, the Real House Price Index was falling, because Americans’ buying power was rising faster than home prices, Fleming said. That’s not the case anymore.

“Deflation has turned into inflation, not because interest rates have gone up — they’ve only gone up a little bit — but because house prices are just crazy,” Fleming said.

The reason home prices are rising so fast is fairly simple. After the Great Recession, home-building activity all but drew to a standstill as the construction industry worked to recover.

As a result, the construction of new homes did not keep pace with population growth and the formation of new households.

That left the housing market with a serious shortage of homes, just as millennials have begun getting married and having kids — traditional hallmarks of home-buying interest.

With the pandemic, the shift to remote working and low interest rates has only exacerbated things.

The primary solution to address runaway inflation in housing will be to build more homes — something that’s easier said than done. “Some of the challenges that we face on the supply side of the residential construction industry are going to persist well into 2022,” Dietz said.

Those challenges run the gamut from the high cost of lumber to the lack of skilled workers to complete construction projects. Another factor: Zoning regulations across the country prevent the construction of more dense housing in many cities, effectively driving up home prices and rents in the process.

Finally, new-home construction alone won’t make matters easier for all Americans. Because of the high costs, it’s easier for builders to construct more expensive homes, even though the demand and competition is strongest for entry-level properties.

James Young, director of the Washington Center for Real Estate at the University of Washington, commented on the challenges facing first-time buyers. “Residential month’s supply (excluding condos) has continued to decline with less than two weeks of inventory in King, Snohomish, and Pierce counties, and slightly more than two weeks in the region. These are amazingly low levels of inventory,” he noted.

 “Coupled with continued low interest rates and eased borrowing criteria, rapidly rising prices reflect huge supply imbalances. Given these imbalances, first-time buyers have had almost no chance to take advantage of low interest rates unless they leave the city. Unfortunately for them, continued supply constraints along the I-5 corridor mean they are increasingly being left out of the market for the whole region. Only a decrease in demand will moderate house price trends,” Young stated.

Industry veteran Mike Grady expects demand will remain strong. “While we’re starting to hear some talk about increasing inflation given a lack of new construction and skilled labor and supply chain shortages, our market is counteracting that,” suggested Grady, the president and CEO at Coldwell Banker Bain. He believes three factors will continue to drive demand for the next six to 12 months: having the main bulk of the millennial generation finally entering their home buying years; the acceleration of retirement of boomers and their subsequent home downsize or relocation moves; and the relocation of people from all over the world to the Pacific Northwest as part of the Work from Home (WFH) mindset due to the coronavirus lockdown.

Chief Economist Matthew Gardner commented on the “pronounced impact” COVID-19 had on the urban Seattle condominium market last year as many condo owners decided to sell and relocate away from the downtown area. “By summer, inventory had jumped to levels we had not seen since the bursting of the housing bubble in 2008, resulting in more supply than demand and lower listing prices.”

Analysists are confident the robust activity will continue. “We are in a prime position to see a good number of resale listings and a proportional number of homes going under contract. Frenzy-level buyer demand has not waned. The local market is still virtually sold out in the more affordable and mid-price ranges, as well as into the luxury ranges in some areas.”

Hansen agreed, reminding buyers “they need to be ready to compete in this market by reviewing successful offer strategies with their broker and lender.”

You Don’t Know What You Don’t Know When Selling Your Home.


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