Peak-Bust Rental Spreads

69 Pages Posted: 24 Nov 2019 Last revised: 19 Feb 2021

See all articles by Marco Giacoletti

Marco Giacoletti

Marshall School of Business

Christopher A. Parsons

Marshall School of Business, University of Southern California

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 reference-dependence and distorted beliefs. In the first, monthly payments establish (recurring) reference points, against which gains or losses are measured. In the second, past sales prices distort landlords’ current estimates of house values/rents.

Keywords: Distorted beliefs, learning from experiences, prospect theory, liquidity constraints

JEL Classification: D40, G00, G40, R31

Suggested Citation

Giacoletti, Marco and Parsons, Christopher A., Peak-Bust Rental Spreads (November 12, 2019). USC Marshall School of Business Research Paper Sponsored by iORB, No. Forthcoming, 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 California 90089
United States

Christopher A. Parsons

Marshall School of Business, University of Southern California ( email )

3670 Trousdale Pkwy
Los Angeles, CA 90089
United States

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