Glenn College Colloquium with Dr. Lara Loewenstein
The Rent-Price Ratio in the 21st Century: Measurement and Implications with Dr. Lara Loewenstein
Using micro-level data, we study the joint evolution of prices and rents on residential property over the past two decades. Our data allows us to identify owner- and renter-occupied property and to construct a sample of property-level price-rent ratios. We then decompose the change in the price of occupant-owned property into three components: (1) changes in rent; (2) changes in the relative price of investor- and occupant-owned property; and (3) changes in the price-rent ratio. We show that (3) accounts for most of the variation in prices during the 2000s boom and bust and during the 2010s, while (1) accounts for a much larger component of the variation in the 2020s. Using economic theory we argue that changes in the price-rent ratio can be driven by either beliefs about future rent growth or changes in the discount rate, but the direction of the effect of changes in interest rates on the price-rent ratio is ambiguous. Using alternative measures of the discount rate, we argue that the 2000s boom and bust were driven by beliefs, while the increase in the price-rent ratio in the 2010s was due to changing discount rates.
Speaker Biography: Lara Loewenstein is a Research Economist in the Banking and Finance Group at the Federal Reserve Bank of Cleveland. Her areas of expertise are commercial and residential real estate and related mortgage markets. She has a B.S. in Mathematics from the University of California in Los Angeles and a PhD in International Economics and Finance from Brandeis University.
No registration required. Attend in person at Page Hall Room 130 (LEC) or on Zoom by clicking "Join on Zoom".