Regional Divergence and House Prices

Greg Howard and Jack Liebersohn
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Jack Liebersohn: University of California, Irvine

Review of Economic Dynamics, 2023, vol. 49, 312-350

Abstract: We document a new fact: regional divergence, the rate at which rich states grow faster than poor states, explains most U.S. house price movements since 1939, including the post-2000 boom-bust-boom cycle. An industry-share instrument provides evidence the relationship is causal, implying the location of economic growth affects national house prices. We propose a model to learn why regional divergence and house prices are related. In the model, high interstate inequality raises rents on average because relative demand for living in a high-income state increases and housing supply in low-income states is elastic. Regional divergence leads to higher expected future interstate inequality, which implies higher expected future rents, and therefore, higher current house prices. The model accurately predicts rents since 1929, which are quite different than prices, as well as cross-sectional moments of prices, rents, construction, and migration. (Copyright: Elsevier)

Keywords: regional inequality; expectations; house price-rent ratio (search for similar items in EconPapers)
JEL-codes: E22 G12 R31 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.red.2022.10.002

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