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Regional Divergence and House Prices

Author

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  • Greg Howard

    (University of Illinois, Urbana-Champaign)

  • Jack Liebersohn

    (University of California, Irvine)

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)

Suggested Citation

  • Greg Howard & Jack Liebersohn, 2023. "Regional Divergence and House Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 312-350, July.
    • Handle: RePEc:red:issued:21-308
    DOI: 10.1016/j.red.2022.10.002
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    3. Chi-Young Choi & Alexander Chudik & Aaron Smallwood, 2024. "Time-varying Persistence of House Price Growth: The Role of Expectations and Credit Supply," Globalization Institute Working Papers 426, Federal Reserve Bank of Dallas.

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    More about this item

    Keywords

    regional inequality; expectations; house price-rent ratio;
    All these keywords.

    JEL classification:

    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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