Introduction to Housing Inflation
Housing inflation refers to the rising cost of living in or purchasing a home. It’s a complex and often misunderstood topic due to the numerous reports that measure different aspects of the housing market, such as home values, rent prices, and material costs, with no standardized formula. The trends in one report may not align with another, and no single inflation benchmark captures all housing-related costs.
What is Housing Inflation and How is it Measured?
Housing inflation can mean different things depending on your point of view. For some, it’s the rising cost of living in a home, including things like rent, utilities, and maintenance. Others might focus on the cost of buying a home, which can reflect both market prices and broader economic forces. Even factors such as neighborhood quality, home size, or construction costs can play a role in how housing inflation affects you. Because no single report encapsulates all these inflationary factors, understanding housing inflation requires piecing together information from multiple sources.
Impact of Housing Inflation on Different Groups
Renters are typically most affected by rising rents and utilities, while buyers, sellers, and investors focus on the total cost of a home purchase or sale. Homeowners may be more concerned with maintenance expenses, property taxes, and mortgage rates. For those building or renovating, higher material and labor costs can have the biggest impact.
Housing Inflation After COVID-19
The COVID-19 pandemic had far-reaching effects on the housing market. The median price of an existing home jumped significantly, driven by reduced new home supply due to building material supply chain disruptions, a shortage of existing housing, and a sudden increase in demand for larger living spaces to accommodate remote work and schooling, at a time when mortgage rates were at a historic low.
The Impact of Rising Home Prices
Rising home prices during the COVID-19 pandemic affected different groups in different ways. Sellers generally benefited from higher sales prices. For homebuyers, however, the impact depended on factors such as available cash for a down payment and mortgage loan terms. Investors in real estate had mixed experiences, with some seeing gains from higher property values, while others, especially those with rental properties, faced challenges due to eviction moratoriums.
Understanding the Consumer Price Index (CPI)
The Consumer Price Index, one of the most frequently cited measures of inflation, excludes home prices. The shelter inflation index, the CPI’s category for inflation in the housing market, makes up more than 30% of the CPI’s total weight but focuses on rental costs rather than home prices.
How the CPI Tracks Housing Inflation
The shelter inflation index measures four components: rent for primary residence, owners’ equivalent rent (OER), lodging away from home, and tenant and household insurance. Home purchase prices are excluded from the index. Instead, the CPI tracks rent and OER, which together make up the largest portion of the shelter inflation index.
Beyond CPI: Other Key Housing Market Reports
Other aspects of housing inflation are reflected in additional data sources, each capturing different components of the market. These include the Producer Price Index (PPI), the S&P CoreLogic Case-Shiller National Home Price Index, the Federal Housing Finance Agency (FHFA) House Price Index, Census Bureau housing data, and the National Association of Realtors existing-home sales report.
Understanding Owners’ Equivalent Rent (OER)
Owners’ equivalent rent is the estimated amount a homeowner would have to pay to rent their own home in the current market. The Bureau of Labor Statistics prioritizes OER in the CPI because it provides a better measure of housing consumption costs, rather than the ongoing cost of living in a home.
Conclusion
Housing inflation isn’t a single, easily defined figure. To understand it, you need to look at various reports and piece together information that’s most relevant to you, whether you’re a homeowner, renter, buyer, seller, or investor. National averages and indexes reflect aggregate trends, not necessarily those in your local area. Considering location, location, and location is crucial to gauge your local housing dynamics. By exploring different reports and understanding what each captures, you can get a fuller picture of housing inflation and how it affects you.
