Constant Quality Rent Indexes for Affordable Housing

This paper develops and applies a method for producing constant quality rent indexes and inflation estimates for different segments of the rental housing stock. In each of the five contrasting metropolitan areas, rent inflation since the late 1980s is found to have varied by market segment. In some metro areas, rental prices have risen most rapidly in the bottom third of the rent distribution, while in other metro areas rental price increases have been greatest in the top third of the rent distribution. The proportion of rent increase attributable to price change, and the estimated annual increase in housing quality, vary by metro area and, within metro areas, by market segment. The method can also be used to price the same bundle of housing attributes across metro markets. Not surprisingly, rental prices are found to vary substantially across markets. However, the differential depends on the market segment. For example, nationally typical upper market rentals are more expensive in Buffalo than in Phoenix, but typical lower market apartments are less expensive in Buffalo than in Phoenix. The results have potential implications for policies and programs targeting the lower rent, or “affordable,” segment of the rental market. Reliance on a single rental index for a metro market can produce misleading indications about where rental prices in the affordable market are highest and where they are increasing most rapidly. As for future research, more could be done to estimate these indexes for more areas, to explain why the results differ from metro to metro, and to identify specific housing policies and programs that could be improved through application of rental price indexes for the affordable segment of the housing market.