With US housing affordability still near all-time lows, these trends are alarming economists and policymakers alike. Despite a recent easing in Consumer Price Index (CPI) shelter inflation, the situation for many homeowners and tenants remains precarious. As detailed by Federal Reserve Governor Michelle Miran, she has been an outspoken proponent for adjusting the way we measure shelter inflation. She argues that the Bureau of Labor Statistics’ new rent index offers a better picture of today’s housing market.
Miran’s call for the BLS to adopt the new rent index stems from its perceived effectiveness in measuring shelter inflation, which many believe has been misrepresented. The new index focuses specifically on rent costs faced by tenants signing new leases, a move meant to highlight real-time rental market dynamics. This approach has been criticized for its narrow focus.
“US housing affordability remains at historic lows despite CPI shelter inflation easing recently,” noted Miran. This declaration brings further attention to the struggles that continue to plague today’s and tomorrow’s homeowners and renters. Appendix C: The recent CPI shelter inflation decrease. Yet millions of Americans remain squeezed by high housing costs.
The long-revered practice of estimating the shelter costs of homeowners via Owners’ Equivalent Rent (OER) is under fire. Critics contend that OER does not do an adequate job of accounting for the real cost that homeowners pay out of their own pockets. Miran emphasized that “the CPI measures homeowners’ shelter costs through owners’ equivalent rent (OER), which closely correlates with rent price indices but does not capture homeowners’ actual out-of-pocket costs.” As it stands, both renters and homeowners can be left in the dark about their financial responsibilities.
There are important lessons to be learned from this new rent index. It completely leaves out people who are already signed up for long-term leases. This significant omission begs the question of how overall accurately we’re measuring shelter inflation in such an increasingly varied housing market today. Critics point out that the new data only includes costs for those entering into new leases and suggests that “we do not agree with his assessment, as new rent data only includes the costs faced by tenants signing a new lease, not those who have already locked in a fixed-term lease and face stable rent expenses month-to-month.”
Additionally, out-of-pocket shelter inflation is probably still running hot given high shelter costs to homeowners across the US. With mortgage rates moving day to day, property values are increasing at an alarming rate. As such, many families are at their breaking point with housing costs. Call for an alternative shelter inflation index is increasing. This index aims to do away with Owner’s Equivalent Rent (OER) in favor of actual mortgage costs, better representing what households are truly spending each month.
The alternative index simply uses different items, but retains the same relative weights as the original CPI index. It provides a far better picture of what people spend every month. By emphasizing what people actually pay, this cost index intends to represent the real-world situation that homeowners and renters are dealing with.