Research Attributes Discrepancies between Rent Inflation Indices to Rent Growth among New Tenants

A new working paper from the Federal Reserve Bank of Cleveland, “Disentangling Rent Index Differences: Data, Methods, and Scope,” investigates the discrepancy between rent growth in the Consumer Price Index (CPI) and in other notable alternative indices, including the Zillow Observed Rent Index (ZORI), the Marginal Rent Index (ACY MRI), and the CoreLogic Single-Family Rent Index (SFRI). The report finds that alternative indices show higher rates of rent inflation because they measure rent growth for new tenants, whereas the CPI measures rent growth for all tenants.

The authors use data collected in the Bureau of Labor Statistics Housing Survey to create two different weighted indices: (1) the new-tenant-repeat-rent index (NTRR) measures rent growth for tenants who just moved into units, in a manner similar to the alternative indices; and (2) the all-tenant-repeat-rent index (ATRR) measures rent growth for all tenants.

The research compares the constructed indices to the CPI and each other to identify what drives differences in rent indices. The authors find that the ATRR index generally tracks very closely to the CPI rent index, despite differences in methodology and comparable source data and scope. The authors then compare their constructed indices, which use the same data and methodology, to each other to evaluate how scope might account for the divergence in inflation rates. The NTRR, which tracks rent growth for new tenants, showed a year-over-year inflation rate of 11.88%, while the ATRR, which tracks rent growth for all tenants, showed an inflation rate of 5.94%. This demonstrates that the scope – and in particular tracking rent growth only among new tenants – contributes to differences in rent inflation rates.

Finally, the authors compare the NTRR index to the alternative indices and find that they are similar despite differences in representativeness. ZORI and SFRI are skewed towards higher-end rental units, and ACY MRI’s dataset consists of large apartment complexes in fewer metropolitan areas. Differences between the NTRR inflation rates and the rates of private indices (ZORI, ACY MRI, and SFRI) are not statistically significant, even though alternative indices have less representative samples. However, unlike ATRR and CPI, they only track the rent growth for new tenants. The similarity between inflation rates captured by NTRR and these private indices confirms that much of the divergence in the rent growth indices from CPI can be attributed to tracking rents among new tenants instead of all tenants.

While CPI is a more comprehensive and stable measure, it also lags significantly behind other indices that only account for new tenants. The NTRR index and its analogous private indices may be more responsive to market shifts and may better capture current market conditions, while the CPI may be more appropriate for studying changes in overall living standards or determining Social Security benefit increases.

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