Consumer Price Indexes for Rent and Rental Equivalence

Rent of primary residence (rent) and Owners' equivalent rent of primary residence (rental equivalence) are the two main shelter components of the Consumer Price Index (CPI). The Shelter index includes the items shown below with the relative importance of each index. The relative importance is the weight of the specific index relative to the All items index. These data are for the U.S. city average CPI for All Urban Consumers (CPI-U) as of December 2006:

The index for an aggregate, such as the Shelter index, is the weighted average of the component indexes. As a matter of fact, the Lodging away from home index is also an aggregate index, the weighted average of its two indented components (see above). Expenditures for each of these 5 components of the Shelter index are estimated directly from data reported by sampled households in the Consumer Expenditure (CE) Interview Survey. Both renters and homeowners are included in the CE sample. In fact, homeowners constitute roughly 66 percent of the CE sample in urban areas.

Rent and rental equivalence weights for index aggregation

The expenditure weight in the CPI for rent is obtained by directly asking sampled renter households the following question:

What is the rental charge to your CU for this unit including any extra charges for garage & parking facilities? Do not include direct payments by local, state or federal agencies. What period of time does this cover?

However, the expenditure weight in the CPI for rental equivalence is obtained by directly asking sampled owner households the following question:

If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?

The CPI Housing Survey.

The CPI Housing Survey is the source of the data on residential rents used to calculate changes in rents for the Rent of primary residence index. The Housing survey also uses these rent data in calculating changes in the rental value of owned homes for the Owners’ equivalent rent of primary residence index. The other shelter components, Lodging away from home and Tenants’ and household insurance, use data from the main CPI pricing survey, which BLS calls the CPI Commodities and Services Survey.

The 1998 revision of the CPI provided an opportunity to initiate an extensive redesign of the Housing survey, and determining rental equivalence was an important issue addressed in the revision. Beginning in January 1999, a new sample design and estimation methodology provided the base for the CPIs for rent and rental equivalence.

Rent—Background

The CPI has had a rent component since its inception; however, in 1978 it made major improvements to its sampling methods.

Sampling. The primary housing sample is a stratified cluster sample, which represents housing units built before the latest decennial census. Housing units built after that census are handled through the New Construction Survey. (See "New construction augmentation" below.) Using data from the Census of Population and Housing, CPI analysts divide the CPI areas into segments (geographic neighborhoods). These segments are then stratified within each CPI area.

New construction augmentation. Primary sample selection is done with every decennial census, so the primary sample represents housing units built before that census. Starting in 1978, when the CPI began using a housing sample based on the 1970 census, BLS has augmented the primary housing sample with housing units constructed since the most recent census. The Census Bureau supplies to BLS a sample of address records from building permits, representing housing units built after that census, and BLS fits these housing units into the sample drawn from that census.

Housing sample pricing. Because rents are not volatile, the CPI can use a longer interval between pricing observations than it uses for other consumer items. The housing sample is divided into six subsamples called panels. Each panel is priced in consecutive order, so that every panel is priced twice a year. For example, panel 1 is priced in January and July, panel 2 in February and August, and so on through panel 6. The segments within the strata are assigned to these panels. These assignments are made such that each panel is a representative subsample of the CPI area. Because each panel is representative of the entire sample and there is never an off-cycle month for the Housing survey, a panel of data provides sufficient information for monthly publication of the rent and rental equivalence indexes.

Rental Equivalence—Background

Until the early 1980s, the CPI used what is called the asset price method to measure the change in the costs of owner-occupied housing. The asset price method treats the purchase of an asset, such as a house, as it does the purchase of any consumer good. Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing. It was implemented for the CPI-U in January 1983 and for the CPI for Urban Wage Earners and Clerical Workers (CPI-W) in January 1985.

Rental equivalence. This approach measures the change in the price of the shelter services provided by owner-occupied housing. Rental equivalence measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market. Clearly, the rental value of owned homes is not an easily determined dollar amount, and Housing survey analysts must spend considerable time and effort in estimating this value.

When initially introduced, the rental equivalence index’s monthly movement was calculated by reweighting the rent sample to represent owner-occupied units. Starting with the CPI for January 1987, the rental equivalence index movement was based on changes in the implicit rents of a sample of owner-occupied units. As part of the 1987 revision, BLS drew a new housing sample to replace the old rent sample. The new sample had both owner- and renter-occupied housing units. To estimate the change in the implicit rents of the owners, the CPI:

• Estimated initial implicit rents by asking the CPI data collectors to work with the owners themselves to estimate the units’ potential rent.
• Measured the change in implicit rents over time by matching owner units to renter units with similar characteristics. The characteristics included location, structure type, and other general traits such as age, number of rooms, and type of air conditioning.
• Derived the change in the implicit rent for each owner unit in the sample from the change in the actual rents of its matched set of renters. Because owners pay for utilities separately, the CPI calculated the pure rent of the matched renters by removing the value of any landlord-provide utilities and furniture. The implicit rents of the owner units were moved by the changes in the pure rents of the matched renters.
• Moved the rental equivalence index by the average changes in the implicit rents of the owner units.

In 1997, BLS started the process of developing a new housing sample to replace the one that had been in use since 1987, and began using it starting with the index for January 1999. BLS dropped the owner sample and returned to the method that was used for the rental equivalence index when it was first introduced, that is, reweighting the renter sample to represent owner-occupied units.

This decision was made for several reasons:

• Moving implicit rents by matching renter and owner observations is inherently a reweighting of the rent sample.
• A large portion of the 1987 sample was devoted to owners, to support the estimation of initial implicit rent. By dropping the owner sample, the field staff would not have to initiate, price, and maintain an owner sample.
• Because owner-renter matching is not needed for rental equivalence, the calculation of the index would be greatly simplified.

Sample Selection for the 1999 CPI Housing Sample

Geographic stratification. Research performed by BLS using 1980 and 1990 census data indicated that location is the most important variable in determining rent change. Once geography is taken into account, only rent level is significant in predicting rent change.

Geographic stratification was used for several reasons:

• It helps ensure sample coverage for the major characteristics (geography and rent level) that are correlated with rent change.
• Stratification is the best way to correlate renter-occupied units with owner-occupied units in the same neighborhood, in order to produce the rental equivalence index.
• Housing units constructed after 1990 can be located and assigned to the existing geographic strata, as described below.

Using data from the 1990 census, CPI analysts, as before, divided the CPI areas into segments (neighborhoods). These segments were then stratified by location within each CPI area. Six geographic strata were formed in each CPI area. Once geography is taken into account, only rent level is significant in predicting rent change, so the stratification boundaries were determined using information about population and median rent level.

Weighting during segment sample selection. CPI analysts then selected segments in the strata to represent housing units constructed before 1990. Because the rent and rental equivalence indexes measure the change in the price of the shelter service provided by both renter-occupied and owner-occupied housing, segments were selected with probability proportional to estimated total expenditures for rent and implicit rent.

Listing and sampling. Listing is the process of recording the addresses of all housing units in a segment to establish a sampling frame. Once BLS field representatives listed a segment, a sampling algorithm selected a set of those addresses for scope determination, or screening, which is the next stage of the process.

New construction augmentation. Geographic stratification was used for the first time for the revised housing sample in January 1999. Once BLS receives the new construction sample, CPI analysts assign each address record to one of the six geographic strata based on the zip code. They then allocate the new construction sample among the segments, using the census sample design and zip code. Because the Census Bureau samples the building permits for BLS, they have already been selected for screening and initiation and do not have to go through the listing and sampling processes again.

Scope determination (screening). After sampling or augmentation the field staff interviews eligible respondents for the selected addresses and determines whether the addresses contain housing units that are in scope for the housing sample. Selected addresses that pass screening proceed to the next stage of the process, initiation.

Rent data collection

For renter-occupied housing, BLS collects data on the contract rent, that is, the rent paid by tenants and received by landlords, and any rent reductions. In addition, BLS collects information on the physical and other characteristics of the rental unit, including the number of bedrooms, bathrooms, and other rooms in the unit; the types of utilities and facilities provided; the type of energy used for heating and cooling; etc. Rent reductions may include financial subsidies furnished by a government to the landlord or a reduction in the rent because the tenant performs some type of work for the landlord or manager.

Initiation. Initiation is the initial collection of rent data. The initial rent is the basis for all calculations of rent change that will occur during the life of the unit in the housing sample.

Pricing. After initiation, the housing unit is priced according to its panel every 6 months, so that price changes can be reflected through the price change calculation described later in this article. When the housing sample reaches full size, the housing survey will interview respondents in approximately 36,000 renter-occupied housing units every 6-months on a rotating, on-panel basis. The housing units may be of any structure type, that is, single, attached or detached, multi- unit, with or without elevator, mobile homes, trailers, and so forth.

Calculating economic rents

BLS derives data on the monthly economic rent for each renter unit in the survey. The economic rent is the contract rent (including the value of certain rent reductions) adjusted by the value of any changes in the services the landlord provides. A change in what renters get for their rents is considered to be a quality change, which may be either positive or negative. The value of any changes is applied to the current economic rent to make it consistent with the previous data. For example, adjustments are made for most changes in utilities and facilities. If the landlord stopped providing electricity, a positive adjustment would be made to the current economic rent to make it consistent with the previous data.

Calculating pure rents

BLS also derives data on the monthly pure rent for each renter unit in the survey for use in the rental equivalence computations. Pure rents are derived in a manner similar to that of economic rents, with some exceptions. Because owners pay for utilities separately, the pure rent excludes the cost of any utilities included in the contract rent. Because of this exclusion, BLS does not adjust the pure rents for changes in utilities.

The rent and rental equivalence estimators

An estimator is a formula that calculates the average change in prices of sample items using current and previous period prices.

Weights for the price relative calculation.

Each renter unit in the sample represents many renter units in the renter universe and many owners in the owner universe. The renter and owner costs of housing in the segment (see "Weighting during segment sample selection" above) are the basis of the renter and owner weights used by the price change calculation for the segment.

The rent index measures the changes in rents paid by tenants and received by landlords adjusted for changes in quality. BLS uses the economic rents and the renter weights to estimate the changes for the rent index. The rental equivalence index measures the change in the price of the shelter service provided by owner-occupied housing. BLS uses pure rents and the owner weights to estimate the changes for the rental equivalence index.

The functions of the price change calculation have been designed to make use of the parallel rent and rental equivalence computations. In general, the calculation aggregates the weighted rents for the units in the index area for the current period and for the period 6 months earlier, and thus computes the price change.

When the rent index is calculated, economic rents and renter weights are used. That is, within each CPI area:

Current 6-month rent change

Current month total renter-weighted economic rents
----------------------------------------------------------------
6-months earlier total renter-weighted economic rents

When the rental equivalence index is calculated, pure rent and owner weights are used. That is, within each CPI area:

Current 6-month rental equivalence change

Current month total owner-weighted pure rents
------------------------------------------------------------
6-months earlier total owner-weighted pure rents

Index Estimation

The current index is equal to the index from 1-month ago multiplied by the estimated 1-month change. Since the index estimation system needs a 1-month price change rather than a 6-month price change, the 6th root of the 6-month changes is used in each CPI area:

Current rent index = 1-month ago rent index X (current 6-month rent change)^1/6

Current rental equivalence index = 1-month ago rental equivalence index X (current 6-month rental equivalence change)^1/6

Information in this report is in the public domain and, with appropriate credit, may be reproduced without permission. This information is available to sensory impaired individuals upon request. Voice phone: 202-691-5200; Federal Relay Service: 800-877-8339.

 

Last Modified Date: February 09, 2007