US: What is actual shelter inflation? - Standard Chartered

Shelter inflation measured by out-of-pocket expenses is likely to have remained elevated. OER likely understates mortgage costs but overstates costs for those without mortgages in recent years. Removing owners without mortgages from the data lowers shelter inflation; but still above shelter CPI, Standard Chartered's economists Dan Pan and Steve Englander report.

Rough time to be a homeowner

"US housing affordability remains at historic lows despite CPI shelter inflation easing recently. 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. Fed Governor Miran has argued that easing rent inflation for properties that are turning over should help contain shelter inflation. While that may be the case for CPI, our findings suggest that out-of-pocket shelter inflation likely remains elevated amid high costs for US homeowners."

"To measure actual out-of-pocket shelter inflation, we create an alternative shelter inflation index by replacing the OER with mortgage costs, i.e., what households actually pay each month out of pocket, while keeping the same relative weights. We find that historically, out-of-pocket shelter inflation has been well below shelter CPI, thanks to low mortgage interest rates and relatively contained housing-price growth. However, the trend reversed after the COVID pandemic, with homeowners' costs remaining close to historical highs amid high mortgage interest costs and rising house prices during the pandemic."

"Miran has advocated using the BLS new rent index as a better measure of shelter inflation given that all-tenant rent data tends to have significant lags. 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. Even when the CPI all-tenant rent index is replaced with the BLS new rent index cited by Miran, out-of-pocket shelter inflation is still well above CPI shelter inflation. The new rent index from Zillow has been running at a more similar level to CPI all-tenant rent; out-of-pocket shelter inflation measured by both has been significantly above shelter CPI."