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Run-up in the House Price-Rent Ratio: How Much Can Be Explained by Fundamentals?

Author

Listed:
  • Kamila Sommer

    () (Georgetown University, FRB Minneapolis)

  • Paul Sullivan

    () (U.S. Bureau of Labor Statistics)

  • Randal Verbrugge

    () (U.S. Bureau of Labor Statistics)

Abstract

This paper studies the joint dynamics of real house prices and rents over the past decade. We build a dynamic general equilibrium stochastic life cycle model of housing tenure choice with fully speci?ed markets for homeownership and rental properties, and endogenous house prices and rents. Houses are modeled as discrete-size durable goods which provide shelter services, confer access to collateralized borrowing, provide sizeable tax advantages, and generate rental income for homeowners who choose to become landlords. Mortgages are available, but home-buyers must satisfy a minimum down payment requirement, and home sales and purchases are subject to lumpy ad- justment costs. Lower interest rates, relaxed lending standards, and higher incomes are shown to account for over one-half of the increase in the U.S. house price-rent ratio between 1995 and 2005, and to generate the pattern of rapidly growing house prices, sluggish rents, increasing homeownership, and rising household indebtedness observed in the data. The model highlights the importance of accounting for equilib- rium interactions between the markets for owned and rented property when analyzing the housing market. These general equilibrium e¤ects can either magnify or reverse the partial equilibrium e¤ects of changes in fundamentals on house prices, rents, and homeownership.

Suggested Citation

  • Kamila Sommer & Paul Sullivan & Randal Verbrugge, 2010. "Run-up in the House Price-Rent Ratio: How Much Can Be Explained by Fundamentals?," Working Papers 441, U.S. Bureau of Labor Statistics.
  • Handle: RePEc:bls:wpaper:ec100090
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    References listed on IDEAS

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    1. Antonia Díaz & María José Luengo-Prado, 2010. "The Wealth Distribution With Durable Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 143-170, February.
    2. Antonia Diaz & Maria Jose Luengo Prado, 2008. "On the User Cost and Homeownership," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 584-613, July.
    3. Ortalo-Magne, Francois & Rady, Sven, 1999. "Boom in, bust out: Young households and the housing price cycle," European Economic Review, Elsevier, vol. 43(4-6), pages 755-766, April.
    4. François Ortalo-Magné & Sven Rady, 2006. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints ," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 459-485.
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    Citations

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    Cited by:

    1. Solomon, Bernard Daniel, 2010. "Firm leverage, household leverage and the business cycle," MPRA Paper 26504, University Library of Munich, Germany.
    2. Shaofeng Xu, 2013. "An Equilibrium Analysis of the Rise in House Prices and Mortgage Debt," Staff Working Papers 13-9, Bank of Canada.
    3. Luis Eduardo Quintero, 2014. "Housing Consumption and Prices in a Unified Metropolitan Market with Heterogeneous Preferences," 2014 Papers pqu53, Job Market Papers.
    4. Dennis Epple & Luis Quintero & Holger Sieg, "undated". "Estimating Hedonic Functions for Rents and Values in the Presence of Unobserved Heterogeneity in the Quality for Housing," GSIA Working Papers 2013-E26, Carnegie Mellon University, Tepper School of Business.
    5. Viktor Dorofeenko & Gabriel S. Lee & Kevin D. Salyer, 2011. "Rationale Erklärungen für Immobilienpreis‐Bubbles: Die Auswirkungen von Risikoschocks auf die Wohnimmobilienpreisvolatilität und die Volatilität von Investitionen in Wohnimmobilien," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(2), pages 151-169, May.
    6. Yongqiang Chu, 2014. "Credit constraints, inelastic supply, and the housing boom," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 52-69, January.
    7. repec:eee:juecon:v:99:y:2017:i:c:p:48-61 is not listed on IDEAS

    More about this item

    Keywords

    house price; rent; house price-rent ratio; housing market equilibrium;

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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