The index for owners' equivalent rent (OER) has risen at just a 1.9 percent annual rate over the last three months. This fact does not seem to be getting any attention in the coverage of the Labor Department's release of the June consumer price index (CPI). It is important for two reasons. First, the low rate of inflation in this index is helping to keep down the core rate of inflation because OER is a huge chunk (almost 30 percent) of the core index. The annual rate of inflation in the core CPI would have been 2.5 percent over the last quarter without the OER component. The other reason why the drop in OER is so important is that it throws yet more cold water on the argument that the house price run-up of the last decade was driven by fundamentals. If fundamental conditions of supply and demand in the housing market explained the run-up in house sale prices, then we should expect to see comparable increases in the rental and ownership market. In fact, while real house prices rose by more than 70 percent, real rents rose by less than 10 percent. And now rents are falling in real terms, making the divergence even greater (at least until house prices start plunging). This fact warrants some attention from the media -- even busy reporters should have time for $8 trillion in housing bubble wealth. [addendum: Lou Uchitelle is on the right track in the NYT.]
--Dean Baker
