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Pricing the US residential asset through the rent flow: A cross-sectional study

  • Goswami, Gautam
  • Tan, Sinan
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    The paper explores how the standard consumption-CAPM fares in pricing housing returns and regional rental income streams in a cross-section of regions. In particular, we estimate the Euler equations associated with the gross housing returns inclusive of price appreciations and rents jointly for several metropolitan areas of the US. The representative agent has a Constant Relative Risk Aversion (CRRA) utility. The rent growth is allowed to depend on the business cycle. When biannual data from 1978 to 2007 is used, the parameter estimates are reasonable, and the model is not rejected. Large standard errors indicate uninformative estimates. The implied price rent ratio time series averages are similar to the data; however the model misses the boom-bust pattern in the prices. The model significantly understates the average and the variance of the price appreciations. Results are robust to allowing housing consumption directly in the utility function or using the Epstein–Zin–Weil utility.

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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 10 ()
    Pages: 2742-2756

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:10:p:2742-2756
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