Estimating Homeownership Costs: Owners' Estimates of Implicit Rents and the Relative Importance of Rental Equivalence in the Consumer Price Index

This paper discusses the relative importance of Rental Equivalence (REQ) in the U.S. Consumer Price Index. A hedonic model of rents is estimated, and the resulting parameters are then used to compare hedonic estimates of implicit rents to homeowner estimates like those actually used to estimate the REQ expenditure weight. There are several reasons why hedonic estimates might be below actual implicit rents, and these effects are controlled for in the model. Owner estimates of implicit rents are then shown to be comparable to such hedonic estimates. Results support the method used to estimate the expenditure weight.