CPI and Market Value
By Rick Stuart, CAEJefferson County Appraiser
April 10, 2003
Each year the Kansas Legislature introduces legislation concerning some method of valuation caps to the amount of increase that a property will receive for one-year. Although normally not specifically stated, they are generally referring to residential property.
Typically the proposed cap mentions or wants to use
the CPI. Most of us have an idea what CPI is, but do we understand exactly what
the components of the CPI are and how they relate to real estate.
There are multiple web pages to review data
concerning CPI but why not go to the real source – the federal government at www.bls.gov. BLS stands for the Bureau of
Labor Statistics. Perhaps the best way to understand the CPI is by using the
Frequently Asked Questions section of the web page. What I believe is key
information is copied below from the web page.
Answer: “The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
Answer: “An index is a tool that simplifies the measurement of movements in a numerical series. For example, most of the specific Consumer Price Indexes (CPIs) have a 1982-84 reference base. That is, BLS sets the average index level (representing the average price level)--for the 36-month period covering the years 1982, 1983, and 1984--equal to 100. The Bureau measures changes in relation to that figure. An index of 110, for example, means there has been a 10-percent increase in price since the reference period; similarly an index of 90 means a 10-percent decrease. Movements of the index from one date to another can be expressed as changes in index points (simply, the difference between index levels), but it is more useful to express the movements as percent changes. This is because index points are affected by the level of the index in relation to its base period, while percent changes are not.”
Answer: “The CPI affects nearly all Americans because of the many ways it is used. One of the major uses is:
As an economic indicator: The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the nation's economy to government, business, labor, and other private citizens, and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies.”
It is also used to measure deflation, but is more
closely associated with inflation, particularly in relation to what the
legislature wants to use it for.
Answer: “The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. The Bureau of Labor Statistics (BLS) has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain "utility level" or "standard of living." Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would comprise a complete cost-of-living framework.”
Answer: “The CPI represents all goods and services purchased for consumption by the reference population (Consumer Price Index for All Urban Consumers or Consumer Price Index for Urban Wage Earners and Clerical Workers). The Bureau of Labor Statistics (BLS) has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:
§
FOOD AND
BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals
and snacks);
§
HOUSING
(rent of primary residence, owners' equivalent rent, fuel oil, bedroom
furniture);
§
APPAREL
(men's shirts and sweaters, women's dresses, jewelry);
§
TRANSPORTATION
(new vehicles, airline fares, gasoline, motor vehicle insurance);
§
MEDICAL
CARE (prescription drugs and medical supplies, physicians' services, eyeglasses
and eye care, hospital services);
§
RECREATION
(televisions, cable television, pets and pet products, sports equipment,
admissions);
§
EDUCATION
AND COMMUNICATION (college tuition, postage, telephone services, computer
software and accessories);
§
OTHER
GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal
services, funeral expenses).”
Also included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls. The CPI also includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services.
The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. (These items relate to savings and not to day-to-day consumption expenses.)
For each of the more than 200 item categories, BLS has chosen samples of several hundred specific items within selected business establishments frequented by consumers, using scientific statistical procedures, to represent the thousands of varieties available in the marketplace. For example, in a given supermarket, the Bureau may choose a plastic bag of golden delicious apples, U.S. extra fancy grade, weighing 4.4 pounds to represent the "Apples" category.
Notice the absence of real estate in the items
considered. It does consider rental information but no consideration is given
to the cost or value of real estate. Would this then be an apple to oranges
comparison?
Below is the CPI table for the Midwest urban region
starting with 1993. You can measure the percent of change in the CPI by
comparing a current index to a previous index. For example lets compare the CPI
for January 1, 2003 to January 1, 1994. This would be as follows:
176.2
/ 141.5 = 1.2452 or a 24.5% increase
over that time period.
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
If value cap legislation tied to the CPI had been in placed starting on January 1, 1994, this would be stating that real estate values would have increased by roughly 25% over that nine (9) year period. The real test would be how that relates to the actual real estate market.
A table is shown below that uses the average
residential sale price of homes in Jefferson County. We should be able to use
the average 2002 and 1994 values to arrive at a percentage of increase for the
same nine (9) year time period.
|
Average Residential Sale
Price |
|||||||||
|
Year |
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
|
Sales
Value ($) |
58,660 |
59,444 |
67,072 |
72,139 |
77,498 |
80,000 |
84,495 |
92,972 |
95,234 |
The amount of market increase would be calculated as follows:
$
95,234 / $ 58,660 = 1.6235 = 62.35% increase
This simple set of calculations shows the fallacy of
using the CPI as a measure of market value when the CPI increases at 25% when
over the same period of time residential real estate increased at a rate of
62%. As we are always told in real estate it is location, location, location.
Not all counties in Kansas or the Midwest region would have as large an
increase as Jefferson County but some areas would be larger. I asked for the
same information from Crawford and Saline Counties. They both have active
markets and in different locations. The indicated increases were: Crawford at
64.15% and Saline at 50.49%. One size does not fit all.
Any kind of value cap would create a discarding of
market value as the basis for ad-valorem taxation. In the real estate market over
the last several years, capping values would have held down the increases and
the values would typically be substantially lower than market value. But what
happens when the market goes down. The value caps would still be in place and
may be contradictory to what is taking place in the market.
Some of us remember the early 1980’s when interest
rates were 18%-21% and the real estate values were flat or going down. I could
not find any typical residential sale prices for this time period but the
analysis can still be made using the table from the BLS below.
Series Id: CUUR0200SA0,CUUS0200SA0 Not Seasonally Adjusted Area: Midwest urban Item: All items Base Period: 1982-84=100 |
|||||||||||||||
|
Year |
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
Annual |
HALF1 |
HALF2 |
|
1980 |
|
78.7 |
|
80.7 |
|
82.8 |
|
82.9 |
|
85.0 |
|
86.3 |
82.4 |
|
|
|
1981 |
|
87.5 |
|
88.3 |
|
90.3 |
|
91.8 |
|
92.1 |
|
92.4 |
90.1 |
|
|
|
1982 |
|
93.5 |
|
94.7 |
|
96.9 |
|
98.6 |
|
98.6 |
|
98.2 |
96.5 |
|
|
|
1983 |
|
98.2 |
|
99.1 |
|
99.9 |
|
100.6 |
|
101.2 |
|
101.5 |
99.9 |
| |