What Explains U.S. House Prices? Regional Income Divergence

Greg Howard and Carl Liebersohn
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Carl Liebersohn: Ohio State University

No 1054, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: A simple measure of regional income divergence explains much of the variation in U.S. house prices since 1939. We develop an asset-pricing theory to explain why. House prices reflect the discounted value of expected rents, which reflect expected incomes. Higher expected regional income divergence increases the house price premium in rich areas. This raises average prices because house prices in poor areas are largely determined by construction costs. In addition to explaining average prices, our model explains several facts about the housing market, including regional variation in prices, the relationship between rents and prices, and patterns of net inter-state migration.

Date: 2019
New Economics Papers: this item is included in nep-geo and nep-ure
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Regional Divergence and House Prices (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1054

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