Why there's so much confusion over housing inflation
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When January inflation numbers came in hot last month, one big reason was a spike in "owner's equivalent rent" (OER), the concept the Bureau of Labor Statistics uses to account for inflation in homes that people own.
- But the uptick may have been largely driven by a change in statistical methodology that was revealed over the last week.
Why it matters: The kerfuffle shows how much of our understanding of the economy rests on abstract concepts and decisions made in the bowels of the statistics-collecting bureaucracy that usually doesn't get much public attention.
- The result is confusion about how high housing inflation really is right now.
Catch up quick: The government measures housing inflation for the Consumer Price Index by tracking OER, which gauges how much it would cost homeowners to rent their own homes.
- It's one of the biggest pieces of the overall CPI — 26.8% — yet is really a hypothetical price since it involves estimating a cost for a transaction that isn't happening
- OER rose by 0.6% in January, contrary to the downshift in housing inflation economists have expected. That's higher than the 0.4% rise in rents on primary residences — that is, what people who rent their home from a landlord are paying.
What's new: A BLS official sent an email last week to labor data "super users," Bloomberg's Matthew Boesler first reported last week, before attempting to recall it.
- The email stated, "The weights for single family detached homes increased materially from December 2023 to January 2024. All of you searching for the source of the divergence have found it."
- That is, the January data included a higher proportion of single-family detached houses relative to townhouses and condos, which evidently accounted for the higher reported growth in OER.
- After receiving "numerous inquiries," the BLS confirmed on its website that "in January 2024, the proportion of OER weighted toward single-family-detached homes increased by approximately 5 percentage points," adding that this new method "better reflects rental markets across the nation."
What they're saying: The BLS did not directly say the new weighting explains the hot OER figure (and some economists say it doesn't fully account for the divergence).
- Still, the upshot might be more upward pressure on this measure of housing costs and, in turn, future inflation readings.
- "If rents are rising more rapidly for single-family units than multi-family and continue to do so ... then this weighting change will boost the OER," says Conrad DeQuadros, senior economic adviser at Brean Capital.
- DeQuadros says it is reasonable to expect hotter price gains for single-family homes given their short supply, especially relative to apartment complexes.
The intrigue: "I had expected [the] OER measure to slow sharply in February to realign with primary rents," before the government's clarification, ING chief international economist James Knightley tells Axios.
- That's because the two measures "rarely move apart," Knightley says, and evidence from private surveys has suggested a slowdown.
- "Now I am not sure what to think," Knightley says. "[I]t runs the risk that we don't see as rapid a slowdown in core CPI as I had previously been expecting."
