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  • Writer's pictureRealFacts Editorial Team

Almost Everyone Looks at Inflation Wrong: BGO Economist


Hundred dollar bills.

"Inflation came in hotter than expected," the familiar refrain echoing through economic circles. But according to Ryan Severino, chief economist at BGO, the reality may not be as dire as it seems. In a recent analysis, Severino highlighted the misinterpretation of inflation data, particularly driven by the shelter component.


The shelter component, which accounts for a significant portion of inflation calculations, has long been a point of contention for Severino and many in the commercial real estate (CRE) sector. During the pandemic, a flood of investor money poured into commercial real estate, including multifamily properties, driving prices up and cap rates down. This influx of capital led to increased apartment rents and, consequently, higher shelter costs, contributing to rising inflation rates.


However, Severino argues that the calculation of owners' equivalent rent (OER), a key component of the shelter index, is flawed. He points out five key issues with the current method:


1. Arbitrary Calculation: OER is determined by asking homeowners how much it would cost to rent their own homes, a figure that many homeowners, and even CRE professionals, struggle to estimate accurately.

2. Unrealistic Representation: OER does not reflect actual costs paid by homeowners but rather serves as a hypothetical calculation akin to opportunity costs.

3. Misclassification of Homeownership: Severino contends that homeownership should be viewed as an investment rather than a consumption good, as it is currently treated.

4. Backward-Looking Metric: OER only updates data every six months, resulting in inaccuracies and stale information that misrepresents current housing market conditions.

5. Unique U.S. Method: The U.S. is the only advanced economy to use this method, which leads to inflation rates that are higher than they would be under a harmonized approach.

Severino suggests that these flawed practices are artificially prolonging higher interest rates and hindering the full recovery of CRE financing. He emphasizes that, despite inflated inflation rates, housing markets still offer attractive long-term investment prospects.


Ryan Severino's insights challenge the conventional wisdom surrounding inflation spikes, offering a new perspective that investors can leverage to make informed decisions. By dissecting the flaws in the calculation of owners' equivalent rent (OER), Severino not only highlights potential inaccuracies in inflation data but also underscores the broader implications for commercial real estate (CRE) investment.


Understanding the discrepancies in how homeownership costs are measured, the backward-looking nature of OER, and the unique methodology employed in the U.S. provides investors with a clearer picture of market dynamics. Armed with this knowledge, investors can navigate inflation-driven fluctuations more effectively, identifying opportunities and mitigating risks in the housing market and beyond.

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