- Introduction
- What is housing inflation and how is it measured?
- Housing inflation after COVID-19
- How the Consumer Price Index tracks housing inflation
- Understanding owners’ equivalent rent (OER)
- Beyond CPI and PCE: Other key housing market reports
- The bottom line
How housing inflation is measured: Prices, rent, and construction costs
- Introduction
- What is housing inflation and how is it measured?
- Housing inflation after COVID-19
- How the Consumer Price Index tracks housing inflation
- Understanding owners’ equivalent rent (OER)
- Beyond CPI and PCE: Other key housing market reports
- The bottom line
Housing inflation refers to the rising cost of living in or purchasing a home, and it’s a tricky and often misunderstood topic. Contributing to the confusion are numerous reports that measure different aspects of the housing market—home values, rent prices, and material costs, among others—with no standardized formula. The trends in one report may not align with another, and no single inflation benchmark captures all housing-related costs.
Key Points
- No single metric defines housing inflation.
- The Consumer Price Index, which is often cited as an inflation measure, excludes home prices.
- Understanding housing inflation requires reviewing numerous data sources.
What is housing inflation and how is it measured?
Housing inflation can mean different things depending on your point of view. For some, it’s the rising cost of living in a home, including things like rent, utilities, and maintenance. Others might focus on the cost of buying a home, which can reflect both market prices and broader economic forces. Even factors such as neighborhood quality, home size, or construction costs can play a role in how housing inflation affects you.
Renters are typically most affected by rising rents and utilities, while buyers, sellers, and investors focus on the total cost of a home purchase or sale. Homeowners may be more concerned with maintenance expenses, property taxes, and mortgage rates. For those building or renovating, higher material and labor costs can have the biggest impact.
Because no single report encapsulates all these inflationary factors, understanding housing inflation requires piecing together information from multiple sources.
Housing inflation after COVID-19
The COVID-19 pandemic had far-reaching effects on the housing market. The median price of an existing home jumped 41.7% from the first quarter of 2020 to the first quarter of 2024, according to the National Association of Realtors. The increase was driven by reduced new home supply due to building material supply chain disruptions, a shortage of existing housing, and a sudden increase in demand for larger living spaces to accommodate remote work and schooling, at a time when mortgage rates were at a historic low.
The impact of rising home prices on buyers, sellers, and investors
Rising home prices during the COVID-19 pandemic affected different groups in different ways. Sellers generally benefited from higher sales prices. For homebuyers, however, the impact depended on factors such as available cash for a down payment and mortgage loan terms. Investors in real estate had mixed experiences. Some saw gains from higher property values, while others—especially those with rental properties—faced challenges. Eviction moratoriums left some landlords covering mortgage payments even as their tenants stopped paying rent.
As significant as the increase in home prices was during this period, it wasn’t reflected in the Consumer Price Index (CPI), one of the most frequently cited measures of inflation published by the Bureau of Labor Statistics (BLS), because the index doesn’t track home purchase prices.
Because no single report captures all these factors, understanding housing inflation means piecing together data from multiple sources.
How the Consumer Price Index tracks housing inflation
Despite its broad use, the CPI excludes an important measure of housing costs: home prices. The shelter inflation index, the CPI’s category for inflation in the housing market, makes up more than 30% of the CPI’s total weight—its largest component—but focuses on rental costs rather than home prices.
CPI vs. PCE: How they measure housing inflation differently
The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s favored consumer inflation report, also tracks shelter inflation, but it differs from the CPI. Published by the Bureau of Economic Analysis (BEA), the PCE index uses a different weighting system and gathers data from sources distinct from the CPI. Shelter inflation also occupies a smaller portion of the overall index. Although the CPI and PCE are similar in what they measure, their methods, data sources, and scope set them apart. Learn more about the CPI, PCE, and the Producer Price Index (PPI).
The shelter inflation index measures four components:
- Rent for primary residence—the monthly amount tenants pay for rent
- Owners’ equivalent rent (OER)—an estimate of how much homeowners might pay if they were renting their home
- Lodging away from home—costs for hotels and motels
- Tenant and household insurance—insurance costs for renters and homeowners
Home purchase prices—such as those listed on real estate websites like Redfin or Zillow—are excluded from the index. Instead, the CPI tracks rent and owners’ equivalent rent (OER), which together make up the largest portion of the shelter inflation index.
Understanding owners’ equivalent rent (OER)
Owners’ equivalent rent is the estimated amount a homeowner would have to pay to rent their own home in the current market.
Why track OER rather than home prices? Because a home’s market price—whether rising, falling, or static—reflects its value as an investment, not the ongoing cost of living in it. OER provides a better measure of housing consumption costs, which is why the BLS prioritizes it in the CPI.
Beyond CPI and PCE: Other key housing market reports
Other aspects of housing inflation are reflected in additional data sources, each capturing different components of the market:
- Producer Price Index (PPI). Published by the BLS, PPI tracks costs to manufacturers, including building materials like lumber, steel, and concrete, as well as residential construction labor. These costs often affect the final price of homes.
- S&P CoreLogic Case-Shiller National Home Price Index. This index tracks real estate price trends in 20 major U.S. metropolitan areas.
- Federal Housing Finance Agency (FHFA) House Price Index. The FHFA monitors single-family home prices in 400 cities nationwide financed through Freddie Mac and Fannie Mae guidelines.
- Census Bureau housing data. This includes the new residential construction report, which provides data on housing permits, starts, completions, and changes in home sizes, offering insight into the nation’s housing supply. The new home sales report tracks monthly sales and prices of new homes, reflecting demand conditions.
- National Association of Realtors existing-home sales report. This report tracks sales and prices of existing single-family homes, condominiums, and co-ops nationwide. It offers insights into price trends, supply, and demand.
- Mortgage Bankers Association weekly mortgage applications survey. The survey tracks loan activity for single-family purchases and refinancing, providing a financing-based perspective on housing demand.
The bottom line
Housing inflation isn’t a single, easily defined figure. You’ll have to look at various reports and piece together information that’s most relevant to you, whether you’re a homeowner, renter, buyer, seller, or investor. The next time you hear something about housing inflation in the news, keep in mind that it likely reflects just one aspect of the market. Look at other reports to get a fuller picture.
And if you’re interested in housing inflation because you’re in the market to buy or sell a home, remember that national averages and indexes reflect aggregate trends, not necessarily those in your area of the world. To gauge your local housing dynamics, you’ll need to consider three additional variables: location, location, and location.