Have we mismeasured real estate inflation?


The “unifying framework” followed by the United States Bureau of Labor Statistics in designing the consumer price index, according to the agency’s manual of methods, is to attempt to answer this question:

What is the cost, at market prices for that month, of reaching the standard of living actually achieved during the reference period?

So, yeah, it’s kind of weird that 24% of the latest CPI, America’s main measure of inflation, is not made up of market prices but of the “implied rent that homeowners would have to pay if they rented their home”.

This “equivalent owner’s rent” tends to blow the heads of non-economists, generating frequent criticism from investors and others. But there’s no sign he’s going anywhere. From 1953 to 1982, the BLS used a different measure based primarily on new home prices and monthly mortgage payments before abandoning it in the face of theoretical criticism from economists and practical concerns about the volatility it added to the CPI. . So, yes, the equivalent landlord’s rent is weird, but there doesn’t seem to be a better alternative.

However, there are currently some important questions about how the BLS measures the rent from which the equivalent landlord rent is derived. Contrary to popular belief, this is not done by asking landlords how much they think their home would be rented out. This question is in fact asked but serves to determine the weighting that the owner’s rent equivalent is given in the CPI (the 24% mentioned above). The monthly changes that determine the rate of inflation are estimated from changes in the rents of similar homes, and these changes in rents are measured by asking thousands of American renters how much they pay. (The 7.4% of the CPI corresponding to the actual rent is also measured by this survey.)

Does this really represent market prices? In other words, if you have a two-year lease or are a long-term tenant with a good relationship with your landlord, does the change (or lack thereof) in your rent accurately reflect what is going with the cost of housing? Probably not, argued economists Brent W. Ambrose and Jiro Yoshida of Pennsylvania State University and N. Edward Coulson of the University of California, Irvine in a series of papers, the first of which appears to have begun to circulating in 2012, and Adam Ozimek (now chief economist of the Economic Innovation Group, a Washington-based think tank) in a Temple University doctoral dissertation in 2013. Better to focus on new leases and measure that what Ozimek called “marginal rents”:

Marginal rents reflect market turns earlier and show a larger drop in rents after the housing bubble. Furthermore, marginal rents seem to predict overall inflation better than average rents.

The experience of the last two years has done much to reinforce this point of view. Zillow publishes a monthly Rent Index that measures changes in asking rents for apartments and houses (like Apartment List and CoreLogic, but I’m using Zillow here because it’s available in seasonally adjusted form), and it shows that inflation rents accelerates rapidly in the first eight months. from last year and decelerating since, while CPI housing inflation rose only slowly last year and has continued to rise this year.

Last month, the BLS released a working paper from two of its economists and two from the Federal Reserve Bank of Cleveland that more or less endorsed this approach. The authors assembled their own rent indexes from BLS rent microdata and found that “rent inflation for new tenants outpaces official BLS rent inflation by 4 quarters. With rent being the largest component of the consumer price index, this has implications for our understanding of headline inflation dynamics and the stance of monetary policy.

The most important of these implications would appear to be that the Federal Reserve’s policy-making committee lagged when it began raising interest rates in March – a year after rents on new leases were raised. started to explode – and could end up again late pivoting towards easing monetary policy long after rents started to fall.

Fed officials can, of course, see what’s happening with the private rent indexes, which CoreLogic came closest to moving in the New Tenants Index presented in the BLS paper. They can even check out the adjusted measure of the CPI less food and energy — known as the core CPI — that Harvard’s Jason Furman, chairman of President Barack Obama’s Council of Economic Advisers, has started compiling. monthly from the Apartment List and Zillow rent indexes and to publish them. on Twitter.

Still, you have to think that monetary policymakers would pay more attention if these measures were part of the official inflation statistics, and the October BLS paper seemed like a trial balloon for that. In his thesis, Ozimek made a case for changing the owner’s equivalent rent component of the CPI, but that seems very unlikely given the volatility it could add to the index. The CPI is used for many other purposes besides shaping monetary policy, including setting Social Security benefit levels and tax brackets, and in the early 1980s the need to prevent these adjustments inflation jumping too high was frequently cited as a reason to change the measure. from housing costs in CPI to the owner’s equivalent rent.

I originated the idea of ​​switching to a new rent metric by Princeton economist and former Fed Vice Chairman Alan Blinder, who wrote an influential paper in 1980 calling for the switch to equivalent landlord rent. “In most cases, making this change would be a terrible idea,” he replied via email. “It would reflect the prices paid by a small, unrepresentative minority. That said, if the BLS (or anyone) wants to create a leading indicator of inflation, using rents on new leases would make perfect sense. Furman also argued that “I don’t think they should combine this in the CPI itself, but provide it as a note line that people, especially monetary policy makers, can combine from the way they want with other CPI information.” It might therefore be better to present it as an alternative measure. But it would be great if the BLS could start doing that before the Fed makes another mistake.

More from Bloomberg Opinion:

• Getting inflation under control is only half the Fed’s battle: Conor Sen

• Your child who doesn’t pay rent is an inflation fighter: Karl Smith

• I can buy because the rent is just too high: Erin Lowry

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering business. Former editorial director of Harvard Business Review, he has written for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market”.

More stories like this are available at bloomberg.com/opinion

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