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Working Paper

House Prices and Rents in the 21st Century

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We study the joint evolution of prices and rents of residential property. We construct indices for both rents and prices of renter-occupied properties and for prices of owner-occupied properties. We then decompose the change in the price of occupant-owned property into three components: (1) changes in rent, (2) changes in the relative prices of investor- and occupant-owned properties, and (3) changes in the price-rent ratio. We use a simple model to link our decomposition to different sources of variation in house prices. We argue that while the 2000s boom was plausibly driven by exuberant expectations, the boom of the 2020s more likely resulted from a preference shock.
Topics
Affordable housing
Business cycles
01.05.2023ISSN 2573-7953 WP 23-02DOI 10.26509/frbc-wp-202302
Keywords House Price Overvaluation, Rent-price Ratio, Credit Shocks, Housing Bubbles
JEL Classification Codes R30, R31, E30, E32, H31

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Loewenstein, Lara, and Paul S. Willen. 2023. “House Prices and Rents in the 21st Century.” Federal Reserve Bank of Cleveland, Working Paper No. 23-02. https://doi.org/10.26509/frbc-wp-202302