Peak-Bust Rental Spreads

66 Pages Posted: 24 Nov 2019

See all articles by Marco Giacoletti

Marco Giacoletti

Marshall School of Business

Christopher A. Parsons

Foster School of Business, University of Washington

Date Written: November 12, 2019

Abstract

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

Giacoletti, Marco and Parsons, Christopher A., Peak-Bust Rental Spreads (November 12, 2019). Available at SSRN: https://ssrn.com/abstract=3482198 or http://dx.doi.org/10.2139/ssrn.3482198

Marco Giacoletti (Contact Author)

Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Christopher A. Parsons

Foster School of Business, University of Washington ( email )

PACCAR HALL
4273 E Stevens Way NE
Seattle, WA 98195
United States

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