IDEAS home Printed from https://ideas.repec.org/a/bla/reesec/v38y2010i4p633-657.html
   My bibliography  Save this article

Explaining the Rent–OER Inflation Divergence, 1999–2007

Author

Listed:
  • Randal Verbrugge
  • Robert Poole

Abstract

U.S. Rent inflation has often greatly exceeded Owners' Equivalent Rent (OER) Inflation. Why? Critics believe that the Bureau of Labor Statistics is making a faulty utilities adjustment to OER and that the Federal Reserve Board should focus only on Rent inflation. Both beliefs are misguided. Herein we decompose the historical Rent–OER inflation differential into its various determinants. The utilities adjustment, which is necessary, sometimes contributed, but is no smoking gun. The main culprit was an economically interesting pattern of differential rent inflation across locales within cities, one common to many cities. Surprisingly, rent control also played a role.

Suggested Citation

  • Randal Verbrugge & Robert Poole, 2010. "Explaining the Rent–OER Inflation Divergence, 1999–2007," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(4), pages 633-657, Winter.
  • Handle: RePEc:bla:reesec:v:38:y:2010:i:4:p:633-657
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/j.1540-6229.2010.00278.x
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Richard K. Green & Amy Crews Cutts & Yan Chang, 2005. "Did Changing Rents Explain Changing House Prices During the 1990s?," Working Papers 0005, School of Business, The George Washington University.
    2. Randal Verbrugge, 2008. "The Puzzling Divergence Of Rents And User Costs, 1980–2004," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(4), pages 671-699, December.
    3. Dixie M. Blackley & James R. Follain, 1987. "Tests of Locational Equilibrium in the Standard Urban Model," Land Economics, University of Wisconsin Press, vol. 63(1), pages 46-61.
    4. Garner, Thesia I. & Verbrugge, Randal, 2009. "Reconciling user costs and rental equivalence: Evidence from the US consumer expenditure survey," Journal of Housing Economics, Elsevier, vol. 18(3), pages 172-192, September.
    5. Jim Clayton, 1998. "Further Evidence on Real Estate Market Efficiency," Journal of Real Estate Research, American Real Estate Society, vol. 15(1), pages 41-58.
    6. Beth Wilson & James Frew, 2007. "Apartment Rents and Locations in Portland, Oregon: 1992 – 2002," Journal of Real Estate Research, American Real Estate Society, vol. 29(2), pages 201-218.
    7. Levinson, Arik & Niemann, Scott, 2004. "Energy use by apartment tenants when landlords pay for utilities," Resource and Energy Economics, Elsevier, vol. 26(1), pages 51-75, March.
    8. Joshua Gallin, 2008. "The Long‐Run Relationship Between House Prices and Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 635-658, December.
    9. Basu, Kaushik & Emerson, Patrick M, 2000. "The Economics of Tenancy Rent Control," Economic Journal, Royal Economic Society, vol. 110(466), pages 939-962, October.
    10. Morris A. Davis & Andreas Lehnert & Robert F. Martin, 2008. "The Rent‐Price Ratio For The Aggregate Stock Of Owner‐Occupied Housing," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(2), pages 279-284, June.
    11. Blackley, Dixie M. & Follain, James R., 1996. "In search of empirical evidence that links rent and user cost," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 409-431, June.
    12. W. Erwin Diewert & John S. Greenlees & Charles R. Hulten, 2009. "Price Index Concepts and Measurement," NBER Books, National Bureau of Economic Research, Inc, number diew08-1, January.
    13. Albert Saiz, 2003. "Room in the Kitchen for the Melting Pot: Immigration and Rental Prices," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 502-521, August.
    14. Joshua Gallin & Randal Verbrugge, 2007. "Improving the CPI’s Age-Bias Adjustment: Leverage, Disaggregation and Model Averaging," Working Papers 411, U.S. Bureau of Labor Statistics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ofer Raz-Dror, 2019. "The Changes In Rent In Israel During The Years Of The Housing Crisis 2008–2015," Israel Economic Review, Bank of Israel, vol. 17(1), pages 73-116.
    2. Ambrose, Brent W. & Coulson, N. Edward & Yoshida, Jiro, 2017. "Inflation Rates Are Very Different When Housing Rents Are Accurately Measured," HIT-REFINED Working Paper Series 71, Institute of Economic Research, Hitotsubashi University.
    3. Randal Verbrugge & Alan Dorfman & William Johnson & Fred Marsh III & Robert Poole & Owen Shoemaker, 2017. "Determinants of Differential Rent Changes: Mean Reversion versus the Usual Suspects," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 45(3), pages 591-627, July.
    4. Ge Bao & Guoliang Feng, 2018. "Testing the Dividend Discount Model in Housing Markets: the Role of Risk," The Journal of Real Estate Finance and Economics, Springer, vol. 57(4), pages 677-701, November.
    5. Shu-hen Chiang, 2016. "Rising residential rents in Chinese mega cities: The role of monetary policy," Urban Studies, Urban Studies Journal Limited, vol. 53(16), pages 3493-3509, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Goeyvaerts, Geert & Buyst, Erik, 2019. "Do market rents reflect user costs?," Journal of Housing Economics, Elsevier, vol. 44(C), pages 112-130.
    2. Robert Poole & Randal Verbrugge, 2007. "Explaining the Rent-OER Inflation Divergence, 1999-2006," Working Papers 410, U.S. Bureau of Labor Statistics.
    3. Chen, Jie & Chen, Yu & Hill, Robert J. & Hu, Pei, 2022. "The user cost of housing and the price-rent ratio in Shanghai," Regional Science and Urban Economics, Elsevier, vol. 92(C).
    4. Arnold Katz, 2017. "Imputing Rents to Owner-Occupied Housing by Directly Modelling Their Distribution," BEA Working Papers 0144, Bureau of Economic Analysis.
    5. Baltagi, Badi H. & Li, Jing, 2015. "Cointegration of matched home purchases and rental price indexes — Evidence from Singapore," Regional Science and Urban Economics, Elsevier, vol. 55(C), pages 80-88.
    6. Robert J. Hill & Miriam Steurer & Sofie R. Waltl, 2017. "Owner Occupied Housing in the CPI and Its Impact On Monetary Policy During Housing Booms and Busts," Graz Economics Papers 2017-12, University of Graz, Department of Economics.
    7. Braga, Breno & Lerman, Robert I., 2019. "Accounting for homeownership in estimating real income growth," Economics Letters, Elsevier, vol. 174(C), pages 9-12.
    8. Ambrose, Brent W. & Coulson, N. Edward & Yoshida, Jiro, 2017. "Inflation Rates Are Very Different When Housing Rents Are Accurately Measured," HIT-REFINED Working Paper Series 71, Institute of Economic Research, Hitotsubashi University.
    9. John Winters, 2013. "Differences in quality of life estimates using rents and home values," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 51(2), pages 377-409, October.
    10. Hill, Robert J. & Syed, Iqbal A., 2016. "Hedonic price–rent ratios, user cost, and departures from equilibrium in the housing market," Regional Science and Urban Economics, Elsevier, vol. 56(C), pages 60-72.
    11. Philippe Bracke, 2015. "House Prices and Rents: Microevidence from a Matched Data Set in Central London," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 403-431, June.
    12. Robert J. Hill & Miriam Steurer & Sofie R. Waltl, 2019. "Owner-Occupied Housing, Inflation, and Monetary Policy," Graz Economics Papers 2019-05, University of Graz, Department of Economics.
    13. Lee, Hung-Wei & Lin, Che-Chun & Tsai, I-Chun, 2023. "Another application of call options: Explaining the divergence between the housing market and the rental market," Finance Research Letters, Elsevier, vol. 53(C).
    14. Ge Bao & Guoliang Feng, 2018. "Testing the Dividend Discount Model in Housing Markets: the Role of Risk," The Journal of Real Estate Finance and Economics, Springer, vol. 57(4), pages 677-701, November.
    15. Hertrich Markus, 2019. "A Novel Housing Price Misalignment Indicator for Germany," German Economic Review, De Gruyter, vol. 20(4), pages 759-794, December.
    16. Frick, Joachim R. & Grabka, Markus M. & Smeeding, Timothy M. & Tsakloglou, Panos, 2010. "Distributional Effects of Imputed Rents in Five European Countries," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 19(3), pages 167-179.
    17. Randal Verbrugge & Alan Dorfman & William Johnson & Fred Marsh III & Robert Poole & Owen Shoemaker, 2017. "Determinants of Differential Rent Changes: Mean Reversion versus the Usual Suspects," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 45(3), pages 591-627, July.
    18. Lin, Jen-Jia & Cheng, Yu-Chun, 2016. "Access to jobs and apartment rents," Journal of Transport Geography, Elsevier, vol. 55(C), pages 121-128.
    19. Philippe Bracke, 2013. "House Prices and Rents: Micro Evidence from a Matched Dataset in Central London_x0003_," ERSA conference papers ersa13p112, European Regional Science Association.
    20. Gianni La Cava, 2016. "Housing prices, mortgage interest rates and the rising share of capital income in the United States," BIS Working Papers 572, Bank for International Settlements.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:reesec:v:38:y:2010:i:4:p:633-657. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/areueea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.