House Prices, Local Demand, and Retail Prices

66 Pages Posted: 1 Dec 2014

See all articles by Johannes Stroebel

Johannes Stroebel

New York University (NYU); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Joseph Vavra

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: November 2014

Abstract

We use detailed micro data to document a causal response of local retail prices to changes in local house prices, with elasticities of 15%-20% across housing booms and busts. Notably, these price responses are largest in zip codes with many homeowners, and non-existent in zip codes with mostly renters. We provide evidence that these retail price responses are driven by changes in markups rather than by changes in local costs. We then argue that markups rise with house prices, particularly in high homeownership locations, because greater housing wealth reduces homeowners' demand elasticity, and firms raise markups in response. Consistent with this explanation, shopping data confirms that house price changes affect the price sensitivity of homeowners, but not that of renters. Our evidence suggests a new source of markup variation in business cycle models.

Suggested Citation

Stroebel, Johannes and Vavra, Joseph, House Prices, Local Demand, and Retail Prices (November 2014). NBER Working Paper No. w20710. Available at SSRN: https://ssrn.com/abstract=2532291

Johannes Stroebel (Contact Author)

New York University (NYU) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Joseph Vavra

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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United States

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