Spatial Dispersion in Returns to Rental Housing: A Decomposition of Local Rent-Price Ratios

Abstract

Using a near-universe of private U.S. rental housing I show that yields predict returns across metros and neighborhoods and that spatial yield dispersion primarily reflects required-return dispersion rather than rent-growth differences. A cross-sectional Campbell-Shiller decomposition implies implausible rent-growth expectations; in 45 years of realized data, differential returns explain about 70% of within-metro and 85% of cross-metro dispersion. Return predictability is stable across subsamples and horizons and has strong out-of-sample fit, consistent with geographic risk premia or capital frictions, with implications for construction capital costs and for how housing returns accrue across buyers.

Keywords: Housing, Gentrification, Housing Returns, Household Finance, Real Estate

JEL Classification: G59, R32, R12, G12