The Puzzling Divergence of Rents and User Costs, 1980-2004
AbstractThis 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.
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Bibliographic InfoPaper provided by U.S. Bureau of Labor Statistics in its series Working Papers with number 422.
Length: 39 pages
Date of creation: Mar 2009
Date of revision:
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More information through EDIRC
user costs; arbitrage; transactions costs; house price appreciation; forecasting; inflation stickiness; rental equivalence; CPI;
Other versions of this item:
- Randal Verbrugge, 2008. "The Puzzling Divergence Of Rents And User Costs, 1980-2004," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(4), pages 671-699, December.
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Production Analysis, and Firm Location - - - Housing Supply and Markets
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data
- C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-05 (All new papers)
- NEP-GEO-2009-09-05 (Economic Geography)
- NEP-MAC-2009-09-05 (Macroeconomics)
- NEP-URE-2009-09-05 (Urban & Real Estate Economics)
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- 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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