Monday, August 14, 2023

Shelter costs are keeping inflation high. The housing market and tax policy aren’t helping either.

The consumer price index (CPI) attempts to represent a typical U.S. household’s spending. Housing is the single biggest expense for most families and that’s true in the CPI too. However, while most people either own or rent their home, the CPI uses an odd metric called owners’ equivalent rent that represents the amount of monthly rent that would theoretically equal monthly homeownership costs.

Regardless, the shelter component of CPI is 34.6%. If housing prices keep rising, that share will go up. Even if shelter costs drop, it’s likely they’ll still be the biggest expense for most American families. Also, even if housing prices are going one way, it’s difficult for total CPI to go the other way.

Adding fuel to the housing fire is tax policy. After World War II, the government thought everybody should own a home, so mortgage interest became a common tax deduction. It was effectively a subsidy that reduced the cost of homeownership, as long as you itemized your tax deductions, which was rarely a problem.

But in 2017, President Trump raised the standard deduction amount to a much higher level. When combined with the Federal Reserve’s low-rate regime, it left most non-wealthy homeowners without any additional benefit from their mortgage interest.

The deduction adjusts each year with inflation. This year a married couple filing jointly receives a $27,700 standard deduction. So, they would need to own a large home and have many other deductible expenses to itemize.

Non-wealthy households no longer have a tax incentive to buy a home. It’s probably not a coincidence that home builders have largely stopped building so-called “starter homes.”

Public policy is having some ill-intended effects on housing.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.