Working Paper: NBER ID: w11643
Authors: Charles Himmelberg; Christopher Mayer; Todd Sinai
Abstract: We construct measures of the annual cost of single-family housing for 46 metropolitan areas in the United States over the last 25 years and compare them with local rents and incomes as a way of judging the level of housing prices. Conventional metrics like the growth rate of house prices, the price-to-rent ratio, and the price-to-income ratio can be misleading because they fail to account both for the time series pattern of real long-term interest rates and predictable differences in the long-run growth rates of house prices across local markets. These factors are especially important in recent years because house prices are theoretically more sensitive to interest rates when rates are already low, and more sensitive still in those cities where the long-run rate of house price growth is high. During the 1980s, our measures show that houses looked most overvalued in many of the same cities that subsequently experienced the largest house price declines. We find that from the trough of 1995 to 2004, the cost of owning rose somewhat relative to the cost of renting, but not, in most cities, to levels that made houses look overvalued.
Keywords: No keywords provided
JEL Codes: R21; R31; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real long-term interest rates (E43) | house prices (R31) |
| expected growth rate of house prices (R31) | user cost of housing (R21) |
| user cost of housing (R21) | price-to-rent ratios (R31) |
| low real long-term interest rates (E43) | sensitivity of house prices to changes in fundamentals (R31) |
| perceived overvaluation (D46) | future price declines (G13) |
| imputed annual rental cost of owning a home (R21) | assessment of housing prices (R31) |
| expectations of outsized capital gains (P17) | current housing prices (R31) |