Location, Location, Structure Type: Rent Divergence within Neighborhoods

Abstract

Housing rents are a large share of household budgets and make a large contribution to overall inflation. Rent inflation rates for different types of housing units sometimes diverge, even in the same neighborhoods. We estimate during 2013 to 2016 apartment rents outpaced rents for detached housing in the United States by 0.76 percentage points annually after controlling for location effects. These rent dynamics imply a segmented housing market. They also suggest rent indexes need to be based on data structurally representative of their measurement objective. In particular, indexes based on professionally managed apartment complexes mismeasure the rents for housing generally. Even indexes based on careful geographical sampling, such as the Consumer Price Index's Owners' Equivalent Rent component, may be biased by using an unrepresentative mix of apartments and houses.

Disentangling Rent Index Differences: Data, Methods, and Scope

“…"Location-locationlocation" has been an aphorism in real estate since at least the 1920s, and rent growth can vary significantly within and across cities (Verbrugge and Poole 2010). Real estate markets are segmented by location, but also by structure type (Adams and Verbrugge 2021). Thus, rental market dynamics vary not only by location, but also by structure type (within a location).…”

Late Payment Fees and Nonpayment in Rental Markets, and Implications for Inflation Measurement: Theoretical Considerations and Evidence

“…Still, late payment fees are large 5 Since owners pay for their own utilities and these are priced separately in the CPI, the rents used in OER construction receive a utilities adjustment; see Verbrugge (2012) for details. Adams and Verbrugge (2021) argue that the OER weights should reflect structure type as well. Their rationale is that while most owned housing is detached, only about 27 percent of the rental market consists of detached homes, and their work demonstrates that there can be a significant inflation differential based on structure type.…”

Late Payment Fees and Nonpayment in Rental Markets, and Implications for Inflation Measurement: Theoretical Considerations and Evidence

“…Given the importance of rent in GDP accounting and in the CPI, any bias in rent measurement is quite consequential (Lebow and Rudd (2003); ; Ambrose et al (2018); and Hill et al (2020)). Recently, the accuracy of the rent and OER indexes of the CPI has been repeatedly questioned (for example, Crone et al (2010); McCarthy, Peach, and Ploenzke (2015); Coy (2018); Nothaft (2018); Ambrose, Coulson, and Yoshida (2015, 2022; Reher (2020); and Adams and Verbrugge (2021)). In this paper, we call attention to a new and quite large source of inaccuracy in rent inflation measurement in the US CPI.…”

“…Since owners pay for their own utilities and these are priced separately in the CPI, the rents used in OER construction receive a utilities adjustment; seeVerbrugge (2012) for details Adams and Verbrugge (2021). demonstrate that the OER weights should reflect structure type as well.…”