A common method to adjust for price differentiation is to compare the price of representative baskets of goods in defined regions and metropolitan areas. Shortcomings in this approach, however, have prompted the Panel to favor other measures of differences in prices across regions. For instance, the BLS compares inflation in baskets of goods thought to reflect the purchases of typical consumers, not just lower-income consumers closer to the poverty line. Also, the market baskets are region-specific and reflect differential regional tastes as well as differential needs. There seems to be universal agreement, however, that housing is a relevant market basket element, and researchers have found that housing costs tend to vary geographically more than other items such as food and clothing.
Various methodologies exist for constructing housing-cost indexes.
Many economists have used hedonic regression models to control for various characteristics of housing such as location, housing quality, and amenities that affect price levels. In looking at the distribution of rents in each area, a fair market rent would be roughly equal to the 45th percentile of the distribution. The Panel also recommends making adjustments for the fraction of the poverty budget accounted for by housing. Though the Census does not account for as many variables as the CPS and SIPP, its sheer volume of observations make it the best source of data for a geographic index. The Panel acknowledges the need for more updating in years between Census reporting to account for variations in housing costs.