The rapid rise in housing prices since the pandemic has fueled fear among Americans already faced with the worst inflation in the last 40 years. The fear of inflation is genuine, but housing prices have nothing to do with it. The Bureau of Labor and Statistics (BLS) incorrectly calculates housing as a component of inflation.
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Inflation is an increase in the cost of the goods and services we consume. The problem is that an increase in the value of one’s home does not affect consumption among Americans – at least for the three quarters of Americans who own their homes. An increase in the value of a home is no different than appreciation in one’s financial assets, such as retirement accounts. If increases in the value of the stock market don’t count in inflation, neither should housing values. Housing is a non-financial asset, just like collectibles and vehicles.
But the BLS doesn’t treat housing that way. It treats the increase in one’s home the same way as the increase in other goods and services consumed by households.
The BLS calculates housing inflation through what it calls “owners’ equivalent rent” (OER). OER represents 24.3% of the basket of goods that comprise the CPI-U index, the largest component of that index. It calculates OER by periodically surveying homeowners and asking them how much rent they could charge for their homes. It is reasonable to expect home values and OER to increase in tandem with one another, although the historical correlation has been weak.
The Case Shiller 20-city composite housing index posted an 18.6% year-over-year gain in 2021. In has been increasing consistently since the financial crisis, and the increase accelerated with the onset of the pandemic. Those increases have not yet filtered into the CPI because of the frequency of the BLS polling. The OER increased 4.1% in 2021. But many fear – wrongheadedly – that once the OER catches up with the Case Shiller increases, reported inflation will skyrocket.
The Fed’s preferred measure of inflation, personal consumption expenditure (PCE), makes the same error. It includes OER in its calculation, but with only about half the weighting that is in the CPI-U.
Read the full article here by Robert Huebscher, Advisor Perspectives
