John Mauldin of Bulls Eye Investing explains how the federal government calculates housing into the inflation figure:

The government currently assumes that housing costs are 23.158% of the Consumer Price Index. Prior to 1982, the housing cost numbers were based upon what you actually spent for the house and the related mortgage. After 1982, the Bureau of Labor Statistics (BLS) began to use an imputed number. They now use what is known as "owners' equivalent rent of primary residence" for the housing portion of the CPI. This is based on an economic theory that says that homeowners are essentially leasing the houses from themselves and paying implied rent for that service. In theory, they are trying to figure out what it would cost you to rent your home.

This makes sense to an extent. Just because the overall value of your house has gone up does not what you are paying for that house has gone up. But there are two problems with the current way the federal government calculates housing in inflation. First, it underestimates the increase in property taxes and second, rents went down during the housing boom as vacancy rates went up under counting how much people are actually paying to live in their houses.