Homeownership and the Cost of Living

How should price indices account for durable goods like housing, which are debt-financed, held for years, and resold?  The U.S. Consumer Price Index equates owner costs with rental costs, which often diverge dramatically from the one-period user cost of owner-occupied housing that is based on interest and maintenance costs and subtracts expected home price appreciation. Heterogeneous preferences for owning and transaction costs can reconcile this divergence, but if owning and renting are not perfect substitutes, then rental costs may not capture the  costs of owner-occupied housing. In this paper, we derive a price index that measures changes to welfare due to changes in housing costs with a money-metric value function. We allocate the welfare change across years using the time path of changes in non-durable consumption. To implement this index, we elicit households' willingness-to-pay (WTP) for homeownership in a customized survey and find large and heterogeneous WTP.  We use the survey and other empirical moments to calibrate a dynamic model of tenure choice and to provide new estimates of the contribution of shelter to the rising cost of living in the U.S. since 2019. A permanent 2 p.p. increase in the mortgage rate causes the shelter price index in our calibrated model to increase by 2.6 p.p. above trend, unlike a rent-based index that does not change by construction. Aggregating over all shocks to shelter, the index falls much less than rent during 2019-2022 and rises less quickly than rent from 2022-2024.