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The equilibrium effect of fundamentals on house prices and rents


  • Sommer, Kamila
  • Sullivan, Paul
  • Verbrugge, Randal


Using a dynamic equilibrium model of housing tenure choice with fully specified markets for homeownership and rental properties, and endogenous house prices and rents, this paper studies the effect of fundamentals on equilibrium house prices and rents. Lower interest rates, relaxed lending standards, and higher incomes are shown to account for approximately one-half of the increase in the U.S. house price–rent ratio between 1995 and 2006, and to generate the pattern of rapidly growing house prices, sluggish rents, increasing homeownership, and rising household indebtedness observed in the data.

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  • Sommer, Kamila & Sullivan, Paul & Verbrugge, Randal, 2013. "The equilibrium effect of fundamentals on house prices and rents," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 854-870.
  • Handle: RePEc:eee:moneco:v:60:y:2013:i:7:p:854-870 DOI: 10.1016/j.jmoneco.2013.04.017

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    References listed on IDEAS

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    Cited by:

    1. repec:aea:aecrev:v:108:y:2018:i:2:p:241-74 is not listed on IDEAS
    2. Silvio Rendon & Nuria Quella, 2013. "Behind the Great Recession: Job Search and Housing Decisions," Department of Economics Working Papers 13-03, Stony Brook University, Department of Economics.
    3. Gete, Pedro & Zecchetto, Franco, 2017. "Distributional Implications of Government Guarantees in Mortgage Markets," MPRA Paper 80643, University Library of Munich, Germany.
    4. Hedlund, Aaron, 2016. "Illiquidity and its discontents: Trading delays and foreclosures in the housing market," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 1-13.
    5. Gianni La Cava, 2016. "Housing prices, mortgage interest rates and the rising share of capital income in the United States," BIS Working Papers 572, Bank for International Settlements.
    6. Piazzesi, M. & Schneider, M., 2016. "Housing and Macroeconomics," Handbook of Macroeconomics, Elsevier.
    7. Núria Quella & Silvio Rendon, 2014. "The Interaction between Job Search and Housing Decisions," 2014 Meeting Papers 1222, Society for Economic Dynamics.
    8. Kashiwagi, Masanori, 2014. "A search-theoretic model of the rental and homeownership markets," Journal of Housing Economics, Elsevier, vol. 26(C), pages 33-47.
    9. Xu, Shaofeng, 2016. "On the welfare cost of rare housing disasters," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 301-318.
    10. Aaron Hedlund & Carlos Garriga, 2016. "Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession," 2016 Meeting Papers 1564, Society for Economic Dynamics.
    11. Bulent Guler, 2015. "Innovations in Information Technology and the Mortgage Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 456-483, July.
    12. Jack Favilukis & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2017. "The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk Sharing in General Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 125(1), pages 140-223.
    13. Philip Arestis & Ana Rosa Gonzales-Martinez, 2017. "Economic precariousness: A new channel in the housing market cycle," FMM Working Paper 12-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    14. repec:bla:intfin:v:20:y:2017:i:1:p:64-91 is not listed on IDEAS
    15. Honglin Wang & Fan Yu & Yinggang Zhou, 2013. "Rental Rates under Housing Price Uncertainty: A Real Options Approach," Working Papers 242013, Hong Kong Institute for Monetary Research.
    16. Torrini Roberto, 2015. "Labour, Profit and Housing Rent Shares in Italian GDP: Long-Run Trends and Recent Patterns," Politica economica, Società editrice il Mulino, issue 3, pages 275-314.
    17. Rüth, Sebastian & Bachmann, Rüdiger, 2016. "Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios," Annual Conference 2016 (Augsburg): Demographic Change 145826, Verein für Socialpolitik / German Economic Association.
    18. repec:eee:macchp:v2-1427 is not listed on IDEAS
    19. Joao Bernardo Duarte & Daniel A. Dias, 2015. "Housing and Monetary Policy in the Business Cycle: What do Housing Rents have to Say?," 2015 Papers pdu385, Job Market Papers.
    20. Aaron Hedlund, 2015. "Failure to Launch: Housing, Debt Overhang, and the Inflation Option During the Great Recession," Working Papers 1515, Department of Economics, University of Missouri.
    21. Anson T. Y. Ho & Jie Zhou, 2016. "Housing and Tax-Deferred Retirement Accounts," Staff Working Papers 16-24, Bank of Canada.

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