At Zonda’s Builder 100 event in May, I spoke about the Bureau of Labor Statistics and challenges with data collection as part of a discussion on “10 Industry Shifts No One’s Talking About (Yet).”
Now that the Bureau and the quality of its data are being widely discussed, it’s worth examining the issue more closely.
Within the next 12 months, a new Fed Chair will be appointed. It’s quite likely that this new appointee will face a weaker set of economic (and housing) data and face increased pressure to cut short-term rates. What’s not being discussed (yet) is the increasingly likely scenario that problems with Bureau data collection also prompt this new Fed Chair to potentially review 2% inflation target over the next 5 years (perhaps earlier), with housing data at the forefront.
Challenges with the Bureau’s data are real. This spring, William Beach, the former Commissioner of Labor Statistics and Head of the US Bureau of Labor Statistics, publicly stated, “Our surveys are dying… decaying.”
He was specifically referring to the Current Population Survey, which measures unemployment, labor force participation, income, and other related factors. In other words, what is ‘decaying’ is the process used to measure key indicators of the Fed’s progress towards its dual mandate of maximum employment and price stability. Some examples include:
Inflation
The Bureau tracks thousands of prices each month, but the quality of those measures is getting worse. Estimated data in CPI inflation calculation has tripled since Q1 and is up 6-7x above 2019 levels. This means that roughly 1/3 of prices measured in CPI are educated approximations (or imputations) by staff. Fine for a stopgap, but certainly a challenge for longer-term monitoring of housing and the economy. This summer, the Bureau ceased measuring CPI for Buffalo, NY, after cutting inflation measures for Provo, UT, and Lincoln, NE a few months earlier (due to higher costs and ongoing difficulty collecting data).
Immigration and income growth
Our research team wrote to the Bureau and Census over a year ago, due to concerns about immigration growth estimates flagged as worrisome by researchers at the Chicago Federal Reserve. Census researchers were transparent, but clear: the economy is becoming increasingly difficult to monitor. Census researchers reported that the same Bureau data collection issue was skewing income growth to appear stronger than reality (2-3%+ over the course of 24 months). Researchers from the Chicago Federal Reserve estimated that immigration growth was overstated due to the same underlying problem (we shared the actual response with clients).
Enter Alternative Data and Housing
The Bureau and Census know there is a problem and are experimenting with ways to remedy. The fix may well impact housing more than most analysts expect (and perhaps sooner). There is growing evidence that the future inflation calculation itself will change. In December 2024, the Bureau publicly noted plans to incorporate nontraditional data as the very basis for CPI calculation. In preliminary tests, differences in prices using new nontraditional data were significant. For example, when the Bureau estimated inflation for televisions using their new method (which the Bureau indicated they preferred and considered more accurate), prices grew 4% lower in inflation-adjusted terms versus the official CPI for the category over a two-year period. To be sure, using alternative data is likely to improve the quality of measuring inflation, as technology now enables the more accurate capture of prices and quality. We expect a new inflation process (and other survey changes) to occur over the next 5 years or so.
What it means for housing
In our view, the implications for housing and building products are significant.
The fastest way to lower official measures of inflation is likely to be by modernizing the housing data used in the CPI calculation. CPI currently estimates ‘Owners’ Equivalent Rent’, driving ¼ of the CPI statistic from a survey of household estimates of what they think their home might rent for.
If alternative data were substituted, we estimate that overall inflation would immediately be 0.4% lower year-over-year than official measures. There is already considerable precedent for adjusting housing within CPI, including how fast data is reflected in official measures of inflation.
For example, in January 2023, the BLS cut the owners’ equivalent rent cycle from 24 months to 12 months, conceivably to more rapidly reflect changes in the official measure. Alternative data would enable even faster changes in signals from rents and other data (which the industry is currently observing) – potentially reducing the lag time from swings in housing to interest rate policy.
Of course, revising how inflation is measured is a bit of a Pandora’s Box – with housing at the center.
Since 2012, the Fed explicitly pointed to a 2% inflation target, but the journey to a 2% price target was originally anchored in how inflation was calculated. During the 1990’s, Fed chair Alan Greenspan privately discussed a 2% long-run inflation objective, partly because of the belief that CPI measures at the time overstated true inflation (indeed, Greenspan mentioned “price stability is zero inflation properly measured”, but that due to CPI calculation, the longer run target might be closer to 2%).
Alan Blinder and Janet Yellen also later expressed similar concerns about modest overstatement of inflation, although with different estimates. If the process of measuring inflation changes with alternative data, do the target, frequency, and future transparency change too? Only time will tell.
What we know is this: as the Bureau data challenges gain attention, the data that the housing market uses to benchmark opportunities will likely be revised in the future. It’s very possible that the inflation measure itself may be recalibrated, which raises even more questions. Housing and housing data is nearly guaranteed to be at the epicenter.
Buckle up because it is a setup for a lot of change and surprise in the key measure used to influence interest rates (and mortgage rates).
- Likely a change to how housing prices and rents impact inflation (and probably interest rate policy more directly and rapidly than what we have become accustomed to over the past 40 years.
- It means housing data on rents, prices, etc, becomes more closely watched than it is today, because it’s the only category with a 25% weight in CPI.