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Peak-Bust rental spreads

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  • Giacoletti, Marco
  • Parsons, Christopher A.

Abstract

Landlords appear to use stale information when setting rents. Among over 43,000 California rental houses in 2018–2019, those last purchased during 2005–2007 (the peak) rent for 2–3% more than those purchased during 2008–2010 (bust). Neither house nor landlord characteristics explain this “peak-bust rental spread.” To clarify the mechanism, we test cross-sectional predictions from a simple theory of rent-setting. We find empirical support for both reference dependence and distorted beliefs. In the first, monthly payments establish (recurring) reference points, against which gains or losses are measured. In the second, past sales prices distort landlords’ current estimates of house values/rents.

Suggested Citation

  • Giacoletti, Marco & Parsons, Christopher A., 2022. "Peak-Bust rental spreads," Journal of Financial Economics, Elsevier, vol. 143(1), pages 504-526.
    • Handle: RePEc:eee:jfinec:v:143:y:2022:i:1:p:504-526
    DOI: 10.1016/j.jfineco.2021.05.061
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    More about this item

    Keywords

    Distorted beliefs; Prospect theory; Liquidity constraints; Residential rents;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G00 - Financial Economics - - General - - - General
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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