What Does the Phrase 'Owners' Equivalent Rent' Mean?

by Jake Costa

    “Owners’ equivalent rent” refers to a statistic calculated by the U.S. Bureau of Labor Statistics that seeks to estimate the average change in housing costs for owner-occupied homes over time for a given area. The BLS uses pwners’ equivalent rent as one component of the Consumer Price Index, which is the number it uses to represent overall inflation.

    Purpose

    The CPI consists of a basket of various consumer goods such as food, clothing and fuel. The BLS calculates the CPI to determine how much it costs to maintain a certain standard of living. Figuring out how to account for housing costs can be a challenge, however, because a house is considered a capital asset that provides a service (shelter) that is consumed over time. As a result, simply measuring changes in the sale prices of houses doesn’t accurately reflect changes in the cost of a shelter as a consumable service.

    Origin

    The BLS first started calculating OER in 1983. Before that, the bureau had used a different measurement to try to track changes in housing costs for homeowners. The previous method had included a number of costs associated with home ownership that it considers to be part of a house’s capital goods cost. The new method took a different approach, in that it tries to estimate how much it would cost for an owner to rent a home equivalent to the one that they own.

    How It’s Calculated

    According to the BLS, OER is defined as "the implicit rent that owner occupants would have to pay if they were renting their homes." To calculate that number, the BLS surveys homeowners, asking them how much monthly rent they think they could charge if they were to rent out their home unfurnished and without utilities. Although the bureau surveys other prices on a monthly or bi-monthly basis, it only conducts the OER survey every six months because housing costs tend not to fluctuate as rapidly.

    What’s Excluded

    To have data that can be accurately compared with the housing costs of renters, the BLS excludes some common costs of home ownership. Mortgage interest, property taxes, real estate fees, maintenance and improvement costs are all considered in the cost of the house as a capital good, rather than the cost of consumption for the shelter that it provides. As a result, the BLS excludes those things to arrive at a comparable figure.

    Photo Credits

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    About the Author

    Jake Costa has been a reporter and editor since 2003. Among other topics, he has covered business, finance, science, technology and the environment. He has written for "The Financial Times," Environmental Leader, "Latin Finance" and Sybase. He has a Bachelor of Arts in literature from the University of Michigan.

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