Working Paper: NBER ID: w20710
Authors: Johannes Stroebel; Joseph Vavra
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.
Keywords: house prices; local demand; retail prices; markup variation; business cycle
JEL Codes: D14; D22; E31; E32; E5; L16; L66; R3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher house prices (R21) | decreased price sensitivity among homeowners (R21) |
| decreased price sensitivity among homeowners (R21) | increased markups by firms (L11) |
| local house prices (R31) | local retail prices (D49) |
| house price changes (R31) | retail price responses in areas with higher homeownership rates (R21) |
| house price changes (R31) | retail price responses in areas with predominantly renters (R21) |