Rising Home Prices Are Mostly from Rising Rents

Abstract: Home prices have been rising, unusually, since the mid-1990s. This increase could be attributed to any number of factors, either temporary or permanent, sustainable or imminently reversible. Those factors include low interest rates, speculation, federal subsidies, and monetary stimulus. In fact, however, rising rents have been the primary factor driving up home prices. This is especially true, in 2021, for the ZIP codes where prices are rising the most. For the period before the Great Recession, the importance of rent is most clear in cross-sectional comparisons of metropolitan areas. The metropolitan areas with the highest rents also had the highest prices. Since the Great Recession, the importance of rents requires looking within metropolitan areas. Generally, in ZIP codes with lower incomes, rents have risen faster, and thus so have prices. This finding has important policy implications. If prices are rising because of monetary stimulus, speculative activity pushing prices above a sustainable norm, or other cyclical or temporary demand factors, then policymakers may aim to pull back on economic stimulus or aim for slowing residential investment, as the Federal Reserve did before the Great Recession. However, if rising rents are the more important factor, then policies aimed at stimulating more construction may be more apt and may help increase real incomes for Americans in neighborhoods where rents have been rising.

JEL code: R310

Keywords: housing, housing price determination, housing prices, housing supply, regional housing market, rent, residential real estate