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The Puzzling Divergence Of Rents And User Costs, 1980-2004

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  • Randal Verbrugge

Abstract

This paper demonstrates that, in the context of U.S. housing data, rents and ex ante user costs diverge markedly-in both growth rates and levels-for extended periods of time, a seeming failure of arbitrage and a puzzle from the perspective of standard capital theory. The tremendous volatility of even appropriately-smoothed ex ante annual user cost measures implies that such measures are unsuitable for inclusion in official price statistics. The divergence holds not only at the aggregate level, but at the metropolitan-market level as well, and is robust across different house price and rent measures. But transactions costs matter: the large persistent divergences did not imply the presence of unexploited profit opportunities. In particular, even though detached housing is readily moved between owner and renter markets, and the detached-unit rental market is surprisingly thick, transactions costs would have prevented risk-neutral investors from earning expected profits by buying a property to rent out for a year, and would have prevented risk-neutral homeowners from earning expected profits by selling their homes and becoming renters for a year. Finally, computing implied appreciation as a residual yields a house price forecast with huge errors; but either longer-horizon or no-real-capital-gains forecasts-which turn out to have similar forecast errors-imply a far less divergent user cost measure which might ultimately be useful for official price statistics. Some conjectures are offered. Copyright 2008 The Author Journal compilation 2008 International Association for Research in Income and Wealth Published by Blackwell Publishing.

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Bibliographic Info

Article provided by International Association for Research in Income and Wealth in its journal Review of Income and Wealth.

Volume (Year): 54 (2008)
Issue (Month): 4 (December)
Pages: 671-699

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Handle: RePEc:bla:revinw:v:54:y:2008:i:4:p:671-699

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  1. Karl E Case & John M Quigley & Robert J Shiller, 2003. "Home-buyers, Housing and the Macroeconomy," RBA Annual Conference Volume, Reserve Bank of Australia, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
  2. Jonathan Heathcote & Morris Davis, 2004. "The Price and Quantity of Residential Land in the United States," 2004 Meeting Papers, Society for Economic Dynamics 32, Society for Economic Dynamics.
  3. Edward L. Glaeser & Jesse M. Shapiro, 2003. "The Benefits of the Home Mortgage Interest Deduction," NBER Chapters, in: Tax Policy and the Economy, Volume 17, pages 37-82 National Bureau of Economic Research, Inc.
  4. Theodore Crone & Leonard I. Nakamura & Richard Voith, 2008. "Rents have been rising, not falling, in the postwar period," Working Papers 08-28, Federal Reserve Bank of Philadelphia.
  5. Donald R. Haurin & Patric H. Hendershott & Dongwook Kim, 1991. "Local House Price Indexes: 1982-1991," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 19(3), pages 451-472.
  6. Theodore M. Crone & Leonard I. Nakamura & Richard Voith, 1999. "Measuring housing services inflation," Working Papers 99-9, Federal Reserve Bank of Philadelphia.
  7. Case, Bradford & Pollakowski, Henry O & Wachter, Susan M, 1997. "Frequency of Transaction and House Price Modeling," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 14(1-2), pages 173-87, Jan.-Marc.
  8. John S. Greenlees, 1982. "An Empirical Evaluation of the CPI Home Purchase Index, 1973-1978," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 10(1), pages 1-24.
  9. Karl E. Case & Robert J. Shiller, 1988. "The Efficiency of the Market for Single-Family Homes," NBER Working Papers 2506, National Bureau of Economic Research, Inc.
  10. Gatzlaff, Dean H & Haurin, Donald R, 1997. "Sample Selection Bias and Repeat-Sales Index Estimates," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 14(1-2), pages 33-50, Jan.-Marc.
  11. Michelle H. Dreiman & Anthony Pennington-Cross, 2004. "Alternative Methods of Increasing the Precision of Weighted Repeat Sales House Prices Indices," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 28(4), pages 299-317, 05.
  12. Jonathan McCarthy & Richard W. Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 1-17.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Rents differ markedly from user costs in the US
    by Economic Logician in Economic Logic on 2009-10-07 14:26:00
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Cited by:
  1. Bert M. Balk & W. Erwin Diewert & Alice O. Nakamura, 2009. "Introduction to price and productivity measurement for housing," Working Papers 09-5, Federal Reserve Bank of Philadelphia.
  2. Erwin Diewert, 2010. "Understanding PPPs and PPP-Based National Accounts: Comment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 36-45, October.
  3. Robert J. Hill & Iqbal A. Syed, 2014. "Hedonic Price-Rent Ratios, User Cost, and Departures from Equilibrium in the Housing Market," Graz Economics Papers, University of Graz, Department of Economics 2014-03, University of Graz, Department of Economics.
  4. Philippe Bracke, 2013. "House prices and rents: micro evidence from a matched dataset in Central London," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 49723, London School of Economics and Political Science, LSE Library.
  5. Winters, John V, 2010. "Differences in Quality of Life Estimates Using Rents and Home Values," MPRA Paper 22455, University Library of Munich, Germany.
  6. Jordan Rappaport, 2010. "The effectiveness of homeownership in building household wealth," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q IV, pages 35-65.
  7. Frick, Joachim R. & Grabka, Markus M. & Smeeding, Timothy M. & Tsakloglou, Panos, 2010. "Distributional Effects of Imputed Rents in Five European Countries," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 167-179.
  8. Cem Aysoy & Cevriye Aysoy & Semih Tumen, 2014. "Quantifying and Explaining Stickiness in Housing Rents : A Turkish Case Study with Micro-level Data," Working Papers 1409, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  9. Matti Viren, 2013. "Is the housing allowance shifted to rental prices?," Empirical Economics, Springer, Springer, vol. 44(3), pages 1497-1518, June.
  10. W. Erwin Diewert & Alice O. Nakamura, 2009. "Accounting for housing in a CPI," Working Papers 09-4, Federal Reserve Bank of Philadelphia.
  11. Bettina Aten & Eric Figueroa & Troy Martin, 2012. "How can the American Community Survey (ACS) be used to improve the imputation of Owner-Occupied Rent Expenditures?," BEA Working Papers, Bureau of Economic Analysis 0080, Bureau of Economic Analysis.
  12. Michael Amior & Jonathan Halket, 2011. "Do Households Use Homeownership To Insure Themselves? Evidence across US Cities," 2011 Meeting Papers 276, Society for Economic Dynamics.
  13. Diewert, Erwin, 2007. "The Paris OECD-IMF Workshop on Real Estate Price Indexes: Conclusions and Future Directions," Economics working papers, Vancouver School of Economics diewert-07-01-03-08-12-12, Vancouver School of Economics, revised 31 Jan 2007.
  14. W. Erwin Diewert, 2009. "Durables and Owner-Occupied Housing in a Consumer Price Index," NBER Chapters, in: Price Index Concepts and Measurement, pages 445-500 National Bureau of Economic Research, Inc.

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