House Prices and Rents in the 21st Century
We study the joint evolution of prices and rents of residential property. After constructing rent and price indices for renter- and owner-occupied properties, we decompose the change in the price of occupant-owned property into (1) changes in rent, (2) changes in the relative prices of investor- and occupant-owned properties, and (3) changes in the price-rent ratio. Via a simple model, we link our decomposition to different sources of variation in house prices. We argue that while the 2000s boom was plausibly driven by exuberant expectations, the boom of the 2020s more likely resulted from a preference shock.
Thanks to Gadi Barlevy, Daniel Cooper, Chris Foote, Peter Ganong, Ed Glaeser, Jaromir Nosal, Joe Nichols, and audiences at the Federal Reserve Mortgage Forum, Homer Hoyt, the Notre Dame Housing Conference, the Cleveland Fed, the 2019 St. Louis Fed Rental Conference, the 2019 AREUEA national confererence, Ohio State University, the 2019 housing conference hosted by the Federal Reserve Bank of Atlanta Center for Housing and Policy and the Georgia State University Department of Real Estate, and the 2021 Midwest Economics Association Annual Conference for helpful comments and suggestions. The views in this paper are not necessarily those of the Federal Reserve Bank of Boston, the Federal Reserve Bank of Cleveland, or the Federal Reserve System. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.