Regional Divergence and House Prices

Research Seminars: Virtual Real Estate Seminar

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. The authors 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, di ering house price sensitivities to national trends, patterns of interstate migration, and surveys of income expectations. An industry shift-share instrument provides causal evidence for their channel. The model implies that while interest rates have an ambiguous effect on house price levels, low rates increase house price volatility.

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Junior Research Associate
Carolin Schmidt
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