“Owners’ equivalent rent” (OER), which is supposed to measure the cost of shelter, is the largest individual component of the Consumer Price Index. It makes up 23.7% of the index compared to 13.9% for food and 9.6% for energy. Despite its importance, OER is calculated in a relatively strange way. It is literally a survey of what current homeowners think that they can rent their home for.
Over the last 20 years, OER has shown a smaller increase in the cost of housing than other measures might have. For instance, below is a comparison of Case Shiller, New Home price data (via Census Bureau) and OER since 1994. Case Shiller is up 2.5x (4.5% annualized) while OER is only up 1.7x (2.6% annualized). That’s a pretty significant difference.
Isn’t there a better way to account for the cost of shelter?
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