Measurement of Homeownership Costs in the Consumer Price Index Should Be Changed

Many economists, members of Congress, and others have questioned whether the consumer price index (CPI) as presently constructed by the Department of Labor's Bureau of Labor Statistics (BLS) is an appropriate measure of the rate of price change for the uses to which it is put. In particular, they have charged that the present method of measuring homeownership costs does not accurately reflect the rate of price change experienced by homeowners in paying for their housing. GAO determined the validity of these concerns and evaluated alternative methods of measuring changes in homeownership costs in CPI.

Homeownership costs have a relative importance of about 23 percent in CPI. The present homeownership component of CPI measures changes in the cost of purchasing, financing, and maintaining houses. Because of its emphasis on these cost changes the CPI homeownership component does not measure either the average change that all homeowners experience or the change in cost for an average homeowner. In addition, the present approach to measuring homeownership costs allows no logical determination of the weight assigned to expenditures on housing in calculating the overall CPI. User cost and nominal outlays are two widely discussed conceptual approaches to measuring the cost of consuming housing services. The user approach measures full economic costs of consuming housing services. The nominal outlays method includes only out-of-pocket expenses, not the full economic costs that homeowners incur. Rental equivalence and a user cost index are two methods of measuring user cost. Rental equivalence views the user as the rental income homeowners forgo by residing in their houses rather than renting them to others. Both the rental equivalence and nominal outlays approaches to measuring the cost of consuming owner-occupied housing services have substantial merit. BLS currently publishes five experimental measures of CPI in which homeownership costs are measured by rental equivalence, user cost indexes, and nominal outlays.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Jay R. Cherlow Team: General Accounting Office: Program Analysis Division Phone: (202) 275-3572