How housing inflation is measured: Prices, rent, and construction costs

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How housing costs stack up.

© Oksana Kuzmina/stock.adobe.com, © Jakub Krechowicz/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc

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.

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.

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.

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.

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.

The shelter inflation index measures four components:

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.

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.

Other aspects of housing inflation are reflected in additional data sources, each capturing different components of the market:

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.