Peak-Bust Rental Spreads
66 Pages Posted: 24 Nov 2019
Date Written: November 12, 2019
Landlords appear to use stale information when setting rents. Among over 43,000 California rental houses in 2018-2019, those last purchased during 2005-2007 (the peak) rent for 2-3% more than those purchased during 2008-2010 (bust). Neither house nor landlord characteristics explain this “peak-bust rental spread.” To clarify the mechanism, we test cross-sectional predictions from a simple theory of rent-setting. We find empirical support for both anchoring and prospect theory. In the first, past sales prices distort landlords’ current estimates of house values/rents. In the second, monthly payments establish (recurring) reference points, against which gains or losses are measured.
Keywords: Anchoring, learning from experiences, prospect theory, liquidity constraints, residential rents, house prices, behavioral biases in real estate
JEL Classification: D40, G00, G40, R31
Suggested Citation: Suggested Citation