About 24% of the value of all those goods and services that make up the Consumer Price Index — what the Bureau of Labor Statistics measures each month to calculate inflation — is tied to something called equivalent rent. owners.
If you drill down into Friday’s CPI housing category, you’ll find that homeowners’ equivalent rent saw its biggest month-over-month increase in 30 years. This is one of the main reasons why inflation was so high in May.
Which begs the question, what is the equivalent landlord rent?
Imagine a couple who bought a house in San Francisco in 1982. You know, back when someone not named Zuckerberg could afford a house there. Let’s say they haven’t had to make a mortgage payment since President Obama’s first term.
The couple may no longer pay directly for housing, but “the Bureau of Labor Statistics would say that this couple is consuming the equivalent amount of housing as people in the area in similar homes who rent those units,” said Judd Cramer of Harvard.
This is the equivalent landlord rent – the hypothetical rent that landlords would pay if they were not landlords or the hypothetical rent they give up by not renting their property.
It can be confusing. So why does BLS do it this way instead of just using Zillow or something?
“Buying a home involves a significant investment component. And we’re not trying to measure investment in the CPI, we’re focusing on consumption,” said BLS economist Steve Reed. “You are consuming the services of a house.”
It’s hard to measure hypothetical rent changes, he said. To do this, BLS tracks 40,000 actual rental properties and then performs sophisticated calculations. To obtain the share of a household’s budget that would go to hypothetical rent, he asks landlords at what price they would rent their property.
Economist Taylor Marr of Redfin said the BLS is doing its best, but from a potential homeowner’s perspective, “it’s underestimating changes in housing costs. And this is because the housing costs for the person who is actually active in the market have much greater fluctuations.
Everyone really has their own personal inflation rate, after all.
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