Owners’ Equivalent Rent (OER): Definition and Relationship to CPI
What Is Owners’ Equivalent Rent (OER)?
Owners’ equivalent rent (OER) is the amount of rent that would have to be paid in order to substitute a currently owned house as a rental property. This value is also referred to as the rental equivalent. In other words, OER figures the amount of monthly rent that would be equivalent to the monthly expenses of owning a property (e.g. mortgage, taxes, etc.).
KEY TAKEAWAYS
- Owners’ equivalent rent (OER) measures how much money a property owner would have to pay in rent to be equivalent to their cost of ownership.
- OER is used to measure the value of real estate markets, where it can help direct individuals to either buy or rent based on the total monthly cost.
- OER tends to be linked to inflation, and so as inflation has risen so has OER.
Understanding Owners’ Equivalent Rent
OER is a commonly cited measure that provides a gauge for changes in real estate market values. If OER is high, it may be more worthwhile to buy a home rather than rent it. On the other hand, if OER is low, renting might be a better prospect.
Owners’ equivalent rent typically changes with movements in the Consumer Price Index. OER increases over time and was steadily increasing up until 2022 when the economy was hit with high inflation, which saw OER increase at higher rates than before 2022.
Evaluating OER
When evaluating housing and shelter, owners’ equivalent rent of a primary residence is one of the three components of the shelter category contributing to the Consumer Price Index (CPI), which measures the average change over time in the prices paid by consumers for a market basket of goods and services.
The calculation takes into account rental values, owners’ equivalent rent, and lodging away from home. These three components are drivers of changes in the total value of shelter. Collectively, these components can be influenced by the real estate market environment overall as well as various monetary factors such as prevailing interest rates, property taxes, available mortgage products, and insurance.
For instance, in April 2023, the shelter component of the Consumer Price Index reported a 0.4% monthly increase and an 8.1% annual increase. Shelter prices were among the highest increases across the CPI in the previous year, with transportation and food away from home having the highest impact. In April 2023, the CPI’s average increase across all items was 0.4%.
U.S. Bureau of Labor Statistics. “Consumer Price Index Summary.”
In addition to serving as a component of the CPI, the Bureau of Labor Statistics also provides data on fluctuations in owners’ equivalent rent monthly. This owners’ equivalent rent is a percentage change that is published by the Bureau of Labor Statistics to measure the change in implicit rent, which is the amount a homeowner would pay to rent or would earn from renting their home in a competitive market.
How Do You Calculate Owners’ Equivalent Rent?
Owners’ equivalent rent (OER) is calculated by a monthly survey of consumers that own their homes. The survey poses the question of how much the owner would pay to rent their home rather than own it.
What Is the CPI Owners’ Equivalent of Rent of Residences?
The CPI owners’ equivalent rent (OER) measures the change in the “shelter” component of the CPI along with “rent of primary residence,” which, both together, is a measure of the change consumers experience in shelter costs.
What Is CPI to Inflation?
The consumer price index (CPI) measures the rate of change in inflation over time. The CPI is based on the prices U.S. consumers pay for goods and services. The percentage change of the CPI over a given period is inflation.
The Bottom Line
Owners’ equivalent rent (OER) is a metric that provides insight into the changes in the real estate market and can help assist consumers in determining whether it is a better time to buy a property or rent a home.
Source: Investopedia
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