House Prices, Local Demand, and Retail Prices

65 Pages Posted: 27 May 2015

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: May 2015

Abstract

We use detailed micro data to document a causal response of local retail price to changes in 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 homeownersÂ’ demand elasticity, and firms raise markups in response. Consistent with this explanation, shopping data confirms that house price changes have opposite effects on the price sensitivity of homeowners and renters. Our evidence has implications for monetary, labor, and urban economics, and suggests a new source of markup variation in business cycle models.

Keywords: business cycle, demand elasticity, household shopping, housing wealth, markup, retail prices

JEL Classification: E12, E21, E31, E32, E52, R22

Suggested Citation

Stroebel, Johannes and Vavra, Joseph, House Prices, Local Demand, and Retail Prices (May 2015). CEPR Discussion Paper No. DP10612. Available at SSRN: https://ssrn.com/abstract=2610727

Johannes Stroebel (Contact Author)

New York University (NYU) ( email )

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National Bureau of Economic Research (NBER) ( 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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Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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