Housing and the Consumer Price Index

Housing and the Consumer Price Index

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July 14, 2022
Housing and the Consumer Price Index
Over much of 2021 and 2022, inflation in the United States
mortgage payments because these are payments toward the
has been high. Housing costs carry a relatively large weight
ownership of the house as an asset. However, BLS does
in the calculation of overall price increases across many
consider the shelter portion of housing—the roof over one’s
measures, notably in the Consumer Price Index (CPI)
head—to be a consumable and, therefore, the relevant price
measure of consumer inflation. Given how much housing
to capture. In this case, the “price” in question is rent, or in
costs affect headline inflation numbers, accurate
the case of owner-occupied houses, the rent that the owners
measurement of housing costs and their changes is crucial
would have to pay if they were renting their houses. This
for accurately portraying inflation. Additionally, house
imputed rent is known as owners’ equivalent rent (OER).
prices are an important indicator of the health of housing
markets and home affordability, so to the extent that
Figure 1. CPI Expenditure Weights
housing inflation is used as an indicator of the housing
2019-2020 Weights
market, accurate measurement is also important. However,
recent readings have caused some confusion as CPI
inflation in the overall housing category, and in the rental
housing and owner-occupied housing subcategories, have
been consistently lower than overall inflation, while certain
measures of house price (such as purchase or list prices)
increases have shown rates well above overall inflation.
This In Focus examines how the price of housing is
measured in the CPI, the way this measurement differs from
other measures of housing prices, and what this measure
does and does not indicate. Of note, this In Focus does not
discuss trends in home affordability. For more information
on those trends and relevant policy considerations, see CRS

In Focus IF12048, High Home Prices: Contributing
Source: Bureau of Labor Statistics.
Factors and Policy Considerations, by Mark P. Keightley
Note: This chart represents only one way to categorize expenditure
and Lida R. Weinstock.
groups in the CPI.
Housing in the Consumer Price Index
Owners’ Equivalent Rent
The Bureau of Labor Statistics (BLS) produces a widely
A challenge with measuring OER is that nobody actually
cited measure of consumer inflation called the CPI. The
pays it—an owner-occupier typically pays a mortgage—so
CPI measures price changes in a “basket” of commonly
it cannot be directly observed. In order to determine OER,
consumed household goods and services on a monthly basis
BLS surveys comparable rental units and, based on the
and weights the items in the basket based on how
actual rent information gleaned, determines the imputed
consumers distribute their expenditures on them. The
rent on the owner-occupied unit in question. BLS asks
housing category of expenditure typically accounts for over
about prices of most items in the CPI on a monthly basis.
40% of total expenditures in the CPI, as can be seen in
However, it asks about rent only once every six months.
Figure 1—more than twice as large as the next largest
Most renters have leases that span several months to several
category (transportation). Of note, this housing category
years, with rent fixed during that period. Therefore, in order
includes many subcategories, such as shelter (rented and
to determine how rent changes over time, BLS surveys a
owner-occupied), fuels and utilities, and household
unit every six months in order to allow time for leases to
furnishings and operations, among others.
change. Practically, this involves surveying one group of
rental units in January and July, the next group in February
Despite the heft of the housing category in the calculation
and August, and so on. Because the CPI is published on a
of the CPI, BLS does not include housing units (i.e., the
monthly basis, BLS takes the sixth root of the six-month
actual buildings) in the CPI market basket. Similarly to
changes in any given month to determine an estimated
many other economic series, housing units are considered
single-month price change.
to be capital (investment) goods as opposed to consumption
items in the CPI. In other words, the purchase price of a
Some economists and policymakers have pointed out
home, renovation costs, or other improvements are not
potential problems with this methodology. First, owner-
considered in the CPI as these are all “investments” that a
occupied markets and rental markets may be fairly different
homeowner will either recoup, realize a return on, or take a
within the same localities. For example, a neighborhood
loss on in the future. Likewise, CPI does not include
made up largely of relatively expensive single family
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Housing and the Consumer Price Index
homes may not be accurately captured by the few rental
Figure 2. House Prices vs. OER Inflation
units in the same neighborhood. Second, the methodology
January 2020 to March 2022
for OER may overstate the expenditure weight for owner-
occupied housing. Another consumer inflation measure, the
Personal Consumption Expenditures (PCE) Price Index,
produced by the Bureau of Economic Analysis, uses a
different methodology than BLS to calculate expenditure
weights. Under this differing methodology, OER has a
weight of about 11% as compared to 23% under the CPI,
suggesting that the PCE underestimates or the CPI
overestimates this weight, or both. Third, owner-occupied
and rental housing would not necessarily be expected to
respond the same to all economic conditions. For example,
mortgage rates directly affect the cost of owning a home
(via monthly payments) but may only indirectly affect
renting insofar as the owner of the rental unit can decide

whether to pass the cost of mortgage payments along to the
Source: FHFA and BLS.
renter. Moreover, demand for buying versus renting can
Both house prices and OER inflation have risen since the
change based on changes in mortgage rates. Since OER is
COVID-19 pandemic began. As noted, the spike in sales
based on rental units and does not include mortgage
prices of houses was more significant than the spike in OER
payments, it may not fully capture the change in cost to
inflation. Nonetheless, OER inflation rose significantly in
owning a home from a change in rates.
2021 and 2022, reaching rates not seen since the 1990s.
However, OER inflation has been lower than overall
How Do Housing Prices and Inflation
inflation, raising concerns that if OER inflation is
Compare?
underestimated, then overall inflation is also
Ultimately, housing inflation and the change in list price or
underestimated. Despite this relatively high rate, some have
purchase price of houses are two different measurements
been speculating as to why current rent and OER inflation
that provide different information. While OER inflation
do not seem to be “matching reality.” In part, this is
may provide some information as to how expensive it is to
because average rents, which the CPI measures, will take
live in a house over time, it is not necessarily helpful in
time to catch up to listed rents/prices. While house prices
determining how expensive it is to buy a house. Depending
and rent prices have been increasing substantially in the
on what information is relevant, it may be helpful to look at
past few years, this does not necessarily automatically mean
one measure or the other or both.
that existing renters and homeowners are facing those
higher prices. It takes time for leases to expire and rents to
Figure 2 compares changes in one prominent measure of
rise, leading to higher average costs with somewhat of a
house prices, the Federal Housing Finance Agency’s
lag. A note published by the National Bureau of Economic
(FHFA) House Price Index®, an index that “measures
Research suggests that housing inflation will be 6.5% to 7%
average price changes in repeat sales or refinancings on the
in 2022. As of May 2022, OER inflation was 5.1% and total
same properties” with OER inflation. The FHFA index
housing inflation was 6.9%.
shows much more volatility. During large upswings or
downswings in house prices OER inflation tends to move in
Alternative Methodologies
the same direction, although notably less so and, at times,
OER is not the only possible methodology to measure
with a lag. This suggests that in the past two decades, the
inflation in owner-occupied housing. There are several
increase in shelter costs for homeowners has remained
other approaches taken by other countries—and even BLS
fairly stable relative to the increase in purchase price of
prior to its adoption of OER in 1983.
homes.
1. The acquisitions approach considers the
purchase price of houses, as well as costs
associated with maintenance and repair, property
taxes, and insurance.
2. The user-cost approach considers the costs of
owning a home minus expected capital gains from
the sale of the home. The theory here is that the
return on investment of selling a house should
equal the opportunity cost of investing in the
house. Therefore, the difference between the cost
of owning a home and the expected capital gains
should equal housing services.
3. The payments approach considers the
expenditures required to live in a house, such as
mortgage payments, maintenance and repair,
property taxes, and homeowners insurance. This is
the method employed by BLS until the 1980s,
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Housing and the Consumer Price Index
4. when it switched to the current flow of services
from the series. While there may not be the same data
approach. Specifically, BLS focused on mortgage
adequacy issues today as in the 1980s, the investment
rates.
versus consumption aspects of homeownership continues to
There is not one approach that is the most correct. Each has
be a reason that BLS uses OER.
its advantages and drawbacks. BLS originally changed its
methodology owing to difficulties in obtaining data and a
Lida R. Weinstock, Analyst Macroeconomic Policy
desire to remove the investment aspect of homeownership
IF12164

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https://crsreports.congress.gov | IF12164 · VERSION 1 · NEW