House Prices, Local Demand, and Retail Prices

Johannes Stroebel and Joseph Vavra

No 20710, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use detailed micro data to document a causal response of local retail prices to changes in local house prices, with elasticities of 15%-20% across housing booms and busts. Notably, these price responses are largest in zip codes with many homeowners, and non-existent in zip codes with mostly renters. We provide evidence that these retail price responses are driven by changes in markups rather than by changes in local costs. We then argue that markups rise with house prices, particularly in high homeownership locations, because greater housing wealth reduces homeowners' demand elasticity, and firms raise markups in response. Consistent with this explanation, shopping data confirms that house price changes affect the price sensitivity of homeowners, but not that of renters. Our evidence suggests a new source of markup variation in business cycle models.

JEL-codes: D14 D22 E31 E32 E5 L16 L66 R3 (search for similar items in EconPapers)
Date: 2014-11
New Economics Papers: this item is included in nep-mac and nep-ure
Note: CF EFG IO LS ME
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Citations: View citations in EconPapers (38)

Published as Johannes Stroebel & Joseph Vavra, 2019. "House Prices, Local Demand, and Retail Prices," Journal of Political Economy, vol 127(3), pages 1391-1436.

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Related works:
Journal Article: House Prices, Local Demand, and Retail Prices (2019)
Working Paper: House Prices, Local Demand, and Retail Prices (2015)
Working Paper: House Prices, Local Demand, and Retail Prices (2015)
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