Every month, the Bureau of Labor Statistics, or BLS, releases a new report on the consumer price index, or CPI. The CPI is the most widely used measure of the cost of goods and services in the U.S. economy. 

It is established through a survey of goods and services available to the public. The CPI gives a measure of how the prices of these goods and services have changed over time.

How Does the Consumer Price Index Work?

The CPI includes a wide range of goods and services, such as food, gasoline, travel, clothing, and housing. Data collection is conducted in 87 major metropolitan areas around the United States. The CPI is widely used as a source for identifying inflation or deflation across the country.

The CPI’s Highly Weighted, Lagging Rent Data

The CPI does a relatively good job of measuring the cost of many consumer goods and services, but it falls significantly short when it comes to housing costs. The CPI does include housing, but it does so through rental costs, not home values. While this does make sense on a level — housing prices are anything but stable, after all — the way it collects data for rents is problematic and often at odds with insights from multifamily industry experts.

The CPI counts the money paid by a resident to a landlord, adding in utility costs. In the case of affordable housing where the government subsidizes rents, the CPI will also capture those subsidies.

This means that the CPI only captures in-place rents. While there is some value in that, this creates a significant lag compared to using asking rents for available units. Furthermore, the CPI gives housing costs (known as its “shelter category”) a full one-third weight of the index. This means that inaccurate data will drastically alter the CPI’s end result.

The consumer price index looks at a sample of approximately 50,000 renters across the country, regardless of when they signed their existing lease agreements. As most multifamily leases run for a one-year period, this can lead to some problems. The largest amount of leases are signed in the late spring or summer. If you’re using in-place rents for a December CPI report, you’re relying on old data. And that may not reflect the reality of the market, state, or country, even en masse.

An Example Highlights the Difference

I’ll walk through this with an example using rents in Las Vegas. In July, let’s say in-place rents were equivalent to $1,600 per month, after a significant increase in rents following the pandemic. Because the CPI is compiled using in-place rental data every six months, these same data points would be used for a November or December report.

But asking rents during this same period may have changed significantly. In Las Vegas, let’s say asking rents in November dropped to $1,550 from the aforementioned $1,600 peak. That’s a fairly hefty decrease, sure, but it’s not impossible — especially going into a recessionary period. This 3.125% decrease wouldn’t be captured fully until long after the leases were signed.

For these reasons, it’s generally far more useful to rely on asking rents, as they indicate real-time changes in the housing market. It’s not a perfect metric, of course — just because a market has higher asking rents doesn’t mean many people are paying them — but it does capture useful trend information.

Does This Mean the CPI Is a Bad Inflationary Indicator?

Not at all. It just means the CPI isn’t the best indicator for housing costs. The Federal Reserve, of course, is aware of this lag issue, but there’s little they can do except to understand that it’s an imperfect measure.

Considering the impact of interest rate increases on cap rates, and it’s really important for multifamily investors that the Fed fully grasp these issues.

3 Ways of Measuring Changes in Rents for Investors

Although the Fed tends to rely more on the CPI than any other metric for inflation — whether for housing or general goods and services — those investing in the multifamily sector have several better options. All in all, though, use one data set at your own peril. Ideally, a blended, nuanced approach is key to understanding how rents are moving.

Private National or Market Rent Surveys

There are a number of good reports out there, whether from a brokerage firm like Cushman & Wakefield or CBRE, or from investment platforms like Costar or Yardi Matrix. These will often give indications of rent growth (sometimes only on a year-over-year basis, but often on a monthly or quarterly basis).

National Average Home Prices 

Home prices are an important component of a housing market. By assessing overall housing prices and looking at changes in price, you can get a pretty good idea of the health of a market. While single-family housing trends aren’t always mirrored by multifamily shifts, it can be a good way to assess how much of a difference exists between renting and buying.

The CPI does look at owned housing but uses a figure called “owners’ equivalent rent,” which instead looks at the cost for someone to rent the property they live in. Understandably, it’s not the most accurate metric out there, so using actual property price changes can be very useful instead — even if the data may shift quickly and significantly.

Local Multifamily Investment Brokers

An experienced local broker can offer insights as to the changes in a housing market, especially looking at how a market’s development pipeline and supply across the quality spectrum matches with renter demand. 

Conclusion

The Consumer Price Index provides an overall look at the cost of goods and services in the U.S., but it can be an inaccurate measure of housing costs due to its use of lagging rental data. What’s more, it has little application at the local level, which is where most multifamily investors are focused. For an accurate picture of housing costs, it is better to look at more forward-looking indicators, whether using national rental market reports or changes in housing prices.