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August 2013

Updating the rent sample for the CPI Housing Survey

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An important derived data element is the normalized rent of each unit. (Normalized means that rents that are not monthly [for example, biweekly rents] are adjusted to a monthly basis.) Normalized rent is the contract rent plus any subsidies the landlord receives and the value of any work that the tenant provides—all normalized, if not so already. In other words, normalized rent is the price of the “housing service” that the unit provided its occupant during the collection month. See appendix C for details on how the normalized rent is derived from the collected data.

However, the service a housing unit provides changes from one collection month to the next collection period 6 months later. At a minimum, the housing unit is 6 months older. Research has shown that as a housing unit ages, the value of housing service that it provides declines. Of course, less subtle changes may exist. For example, the landlord may stop providing heat or electricity or may have changed the unit structurally. Because the service a housing unit provides changes between collection periods, the CPI cannot estimate rent change from the change in the normalized rents as calculated in two different collection periods. The key requirement for the prices that CPI uses to calculate price change is that the prices be for comparable items (goods or services) in two periods.

For these reasons, the Housing Review and Correction Preprocessor (HRCP) calculates two prices each month for the Rent index and, because its underlying concept is different, another two prices for the OER index. “Economic” rent is the CPI price used for calculating Rent index. The HRCP computes the current-period economic rent and the 6-month-previous economic rent for each housing unit each time it is on-panel. Similarly, “pure rent” is the CPI price used for calculating the OER index calculation. The HRCP computes its current-period pure rent and its 6-month-previous pure rent for each housing unit each time it is on-panel.

The Rent index uses a contract rent concept in which the items that the landlord provides at no extra cost (e.g., utilities) are part of the service the housing unit provides. (The rent index must adjust for the quality change if the extras change; but as long as they do not change, they are part of the economic rent.) The concept for OER is defined as what an owner-occupied housing unit would rent for unfurnished and without utilities. Pure rent, therefore, excludes the estimated value of any landlord-provided utilities. See appendix C for details on how the economic and pure rents are derived.

Housing index calculation

Every month, the Housing Price Relative Calculation (PRC) system calculates a 1-month relative of price change for each of the 38 CPI areas for the two Housing components (OER and Rent) for use in calculating basic indexes and higher-level aggregate indexes. Each 1-month relative of price change is the sixth-root of a 6-month relative of price change.

A 6-month housing relative is the ratio of the weighted average current-period prices of the rental units in the CPI area’s Housing Survey sample to the weighted average 6-month-previous prices of the same rental units. For the Rent averages, the current and previous prices of a sampled housing unit are its current and previous economic rents, of course. Its weight is the average number of dollars of rental expenditure the sampled housing unit represents in the renter-occupied housing universe. For the OER averages, the current and previous prices of a sampled housing unit are its current and previous pure rents and its weight is the number of dollars of implicit rental value a sampled housing unit represents in the owner-occupied housing universe. See appendix D for details on Housing Price Relative and Index Calculations.

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About the Author

Frank Ptacek
ptacek.frank@bls.gov

Frank Ptacek is a supervisory economist and Chief of the Office of Prices and Living Conditions, Housing section.