Regime-Dependent Housing Valuations: Price-Rent Ratios, Volatility, and Structural Breaks in U.S. Markets

We propose a present value model with structural breaks to explain why U.S. house prices remain persistently high relative to rents—a pattern that standard time-invariant models struggle to capture. Our model uses quarterly data from 1975 to 2023 and incorporates the time-varying volatility of the net discount factor as a key priced risk factor. We find five distinct periods with very different pricing patterns. During the Great Moderation (1981-2001), the usual textbook logic held: higher expected rent growth pushed valuations up, while higher discount rates pulled them down. But in the stagflation era of the late 1970s and again in the recent period (2016-2023), these relationships reversed-higher expected rent growth actually lowered valuations. The two big housing booms of the 2000s and the recent period arose through different forces: the 2000s boom saw prices break free from rents, while the recent period showed an unusually strong reaction to discount rates and a new positive role for volatility, suggesting that uncertainty itself made housing more attractive. These shifting patterns show that what once looked like model failures are better understood as signs of changing market regimes.