Courtesy of Mish.
In the wake of rising housing prices a reader asked if I would revisit my March 2102 article How Far Have Home Prices "Really" Fallen.
The reader specifically wanted an update on inflation as measured by the HPI-CPI (a measure of the CPI where actual home prices instead of rent is the largest CPI component).
Here is some background on the request: The CPI does not track hope prices per se, rather the CPI uses a concept called "Owners' Equivalent Rent" (OER) as a proxy for home prices.
The BLS determines OER from a measure of rental prices and also by asking the question “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
If you find that preposterous, I am sure you are not the only one. Regardless, rental prices are simply not a valid measure of home prices.
OER Weighting in CPI
OER has the single largest weight of any component in the CPI, at 23.957%.
Let's play "What If?" Specifically, "What if the BLS used actual home prices instead of OER in calculating the CPI?"
Home Price Data
Home price data in this post is courtesy of Lender Processing Services(LPS), Specifically the LPS Home Price Index (HPI).
…
