Explaining the Rent–OER Inflation Divergence, 1999–2007

Randal Verbrugge and Robert Poole

Real Estate Economics, 2010, vol. 38, issue 4, 633-657

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.

Date: 2010
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