Regional Divergence and House Prices

Fisher College of Business Working Paper No. 2020-03-004

Charles A. Dice Working Paper No. 2020-04

50 Pages Posted: 13 Apr 2020 Last revised: 28 May 2020

See all articles by Greg Howard

Greg Howard

University of Illinois at Urbana-Champaign

Jack Liebersohn

University of California, Irvine

Date Written: May 27, 2020

Abstract

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

Howard, Greg and Liebersohn, Jack, Regional Divergence and House Prices (May 27, 2020). Fisher College of Business Working Paper No. 2020-03-004, Charles A. Dice Working Paper No. 2020-04, Available at SSRN: https://ssrn.com/abstract=3570654 or http://dx.doi.org/10.2139/ssrn.3570654

Greg Howard

University of Illinois at Urbana-Champaign ( email )

Jack Liebersohn (Contact Author)

University of California, Irvine ( email )

P.O. Box 19556
Science Library Serials
Irvine, CA 62697-3125
United States

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