MaxedOutMama

The Fed has raised its target rate since June 2004 from 1 percent to 3 percent. Mr. Fisher seems to imply it would go to 31/4 percent and hold there at least several months. This is exceptionally good news for the investor class and the economy. To be sure, Mr. Fisher is hardly speaking from left field. The indicators soundly back him up.
The oil-price shock has not spilled over into nonoil or nonenergy price increases. The core consumer spending deflator (excluding food and oil) -- Alan Greenspan's favorite price measure -- has been steady at only 1.6 percent growth over the last eight months.
What's more, sensitive commodity and market-price indicators that tend to lead inflation have turned down with a vengeance. This includes gold, raw materials and Treasury-bond rates. Meanwhile, the difference between long- and short-term interest rates, known as the slope of the Treasury yield curve, has narrowed substantially, though it still remains positive and normal. These are all signs inflation is contained and well within the Fed's target range.

The much-watched Consumer Price Index (CPI) has doubled to 3.5 percent since 2002, fed mostly by higher energy prices. The pace of increase in the last three months was faster still at 6.2 percent, according to the Labor Department, which publishes the index....
The influence of global disinflationary forces is most evident in the falling prices for imported goods, such as technology and clothing. Computer prices, for example, dropped by 16 percent in the last year, while women's apparel prices fell by 1.8 percent.
Lower costs overseas also work indirectly to keep a lid on prices in the United States, particularly by holding down labor costs in industries that compete with China and other nations where the cost of labor is only a fraction of U.S. levels.
Labor costs, which constitute as much as two-thirds of a business's overall expenses, have been particularly subdued since the 2001 recession. Many American workers have been getting no raises at all, or wage gains that are less than the rate of inflation.

The institute contends that the department's methods are suspect because they were instituted at a time when the Clinton administration and Congress were looking for ways to cut the budget deficit. Political leaders viewed the price adjustments as an unobtrusive but powerful way to save the government money.
The price index is used to determine inflation adjustments each year in Social Security and other government-benefit programs that constitute a big and growing share of the federal budget.

Recently, the cost of rent has fallen dramatically as a percentage of a home's price — an unusual development that economists say could be evidence of a price bubble in the housing market.
Normally, the annual cost of rent should be between 6 percent and 10 percent of the home price, according to John P. Calverley, chief economist at American Express Bank.
Last year, the ratio of rental income to home prices dropped to 3.5 percent nationwide and was even lower in areas of the East and West coasts — including Washington — where housing inflation has been the highest.

The purchase of investment homes last year was up 14% over the prior year, representing the purchase of about 1.8 million homes. Add this to the sales of second homes, mix in the investment/vacation home market, and that activity amounts to more than a third of the total current home-sales market. So, who is buying what, and for what purpose?

There’s also anecdotal information that points to the potential for a bursting bubble. A recent news report suggests that flipping low-priced homes is on the increase in that city. Property values in Buffalo are among the lowest in the country, and the report indicates most of the flipping is done by out-of-town investors, including some from as far away as California.

How are they able to buy and sell so easily and quickly from so far away? Answer: the Internet, which adds an entirely new dimension to potential bubble development. The report even suggests some homes have been bought and sold on eBay.

A rise in speculation
“Speculation is not dominating the market, although it is on the rise,” Lereah says. Despite the increase, he adds that most residential real estate purchases are rational.

High home price-to-income ratio
“The home price-to-income ratio is alarmingly high, especially in California, rising from 23 percent in 2003 to 32 percent in 2004,” says Lereah.

Increased use of ARMs
In the past year, ARMs have made up 30 to 40 percent of mortgage loans, when they should actually be around 25 percent. “The increase in the use of adjustable rate mortgages at a time when fixed mortgage rates are at historic lows is troubling.”

Regionally, the home resale pace in the South jumped 7.4 percent from March to a record annual rate of 2.74 million units in April, and was 8.3 percent higher than a year ago. The median price of an existing home in the South was $176,000, which was 8.0 percent higher than April 2004.

Total existing-home sales in the Midwest rose 5.8 percent to a record annual rate of 1.64 million in April, and were 3.8 percent above April 2004. The median price in the Midwest was $166,000, up 12.9 percent from a year earlier.

Existing-home sales in the Northeast increased 4.3 percent to a record annual pace of 1.20 million units in April, and were 7.1 percent above the level of a year ago. The median existing-home price in the Northeast was $243,000, up 15.2 percent from April 2004.

Existing-home sales in the West held even at an annual rate of 1.61 million units in April, and were 2.5 percent higher than April 2004. The median existing-home price in the West was $305,000, up 21.0 percent from the same month a year ago.