Soaring House Prices Reflect a Shortage of Homes Rather than a New Housing Bubble

The 2020 COVID-19 pandemic has brought to light a flaw in the accounting and pricing of housing services in consumer spending (PCE) and the consumer price index (CPI). The dramatic shifts in housing usage caused by the pandemic have not registered at all in PCE. This paper takes a fresh look at the use of opportunity costs to measure housing services. It shows how the current gauge can miss real changes in services flows. The paper proposes that housing services be measured instead by hedonic methods, using new survey questions added to the Consumer Expenditure Survey (CES) and the CPI.