Regional Divergence and House Prices
Charles A. Dice Working Paper No. 2020-04
50 Pages Posted: 13 Apr 2020 Last revised: 28 May 2020
Date Written: May 27, 2020
This paper develops a model of the U.S. housing market that explains much of the time series of rents and house prices since World War II. House prices depend on expectations of future rents. We show that rents are tied to regional income inequality, and therefore, house prices are determined by how much faster incomes are growing in richer regions. This theory also matches many cross-sectional facts, including regional variation in rents and prices, differing house price sensitivities to national trends, patterns of inter-state migration, and surveys of income expectations. An industry shift-share instrument provides causal evidence for our channel. The model implies that while interest rates have an ambiguous effect on house price levels, low rates increase house price volatility.
Keywords: housing prices, rents, divergence
JEL Classification: R31, G12, E22
Suggested Citation: Suggested Citation