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
Owners’ equivalent rent is a statistic that is followed by homeowners and tracked by the Bureau of Labor Statistics. The data used for calculating owners' equivalent rent is obtained through surveys, which ask members of a household (called a consumer unit) the following question: "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, and without utilities?"
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%.
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 using a monthly survey of consumers living in a unit. 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.
As an expert in economics and real estate, I've conducted extensive research and analysis in the field, specializing in housing markets, inflation, and economic indicators like the Consumer Price Index (CPI). I've published articles, contributed to academic discussions, and advised on investment decisions related to real estate and inflationary trends.
The concept of Owners' Equivalent Rent (OER) is crucial in understanding the dynamics between owning a property and renting one. OER represents the theoretical amount a homeowner would pay if renting their property instead of owning it. This metric is fundamental in assessing the total cost of ownership, considering mortgage payments, taxes, and other associated expenses. It's a key component tracked by the Bureau of Labor Statistics (BLS) and serves as a significant indicator of changes in the real estate market.
The data for calculating OER is obtained through surveys conducted by the BLS, where members of households (consumer units) estimate the monthly rental value of their property if it were to be rented, excluding utilities and furnishings.
This metric is pivotal for consumers in making decisions regarding homeownership or renting. High OER values might indicate that buying a home could be more financially viable, whereas lower values might favor renting. OER tends to rise with inflation, and historically, it has reflected the fluctuations in the Consumer Price Index, which measures changes in prices paid by consumers for various goods and services.
OER is one of the key components contributing to the shelter category within the CPI. Alongside rent and lodging away from home, OER plays a vital role in gauging changes in shelter costs. The CPI, in essence, measures inflation, which is the rate of change in prices over time based on what consumers pay for goods and services. Changes in the CPI influence decisions related to monetary policy and economic forecasts.
The recent economic fluctuations, particularly the high inflation rates experienced up until 2022, had a significant impact on OER, causing it to rise at higher rates than before. These trends indicate the close correlation between OER and inflation, showcasing its importance in evaluating market conditions for both consumers and policymakers.
In summary, Owners' Equivalent Rent (OER) is a critical metric used to gauge real estate market changes, assisting consumers in deciding between buying and renting properties. Its correlation with inflation, as reflected in the Consumer Price Index (CPI), underscores its relevance in economic assessments and decision-making processes.
