Abstract
Randal Verbrugge (2009)
"The Puzzling Divergence of Rents and User Costs, 1980-2004"
This paper demonstrates that, in the context of U.S. housing data, rents and ex ante user costs diverge
markedly—in both growth rates and levels—for extended periods of time, a seeming failure of arbitrage
and a puzzle from the perspective of standard capital theory. The tremendous volatility of even
appropriately-smoothed ex ante annual user cost measures implies that such measures are unsuitable
for inclusion in official price statistics. The divergence holds not only at the aggregate level, but at the
metropolitan-market level as well, and is robust across different house price and rent measures. But
transactions costs matter: the large persistent divergences did not imply the presence of unexploited
profit opportunities. In particular, even though detached housing is readily moved between owner and
renter markets, and the detached-unit rental market is surprisingly thick, transactions costs would have
prevented risk-neutral investors from earning expected profits by buying a property to rent out for a
year, and would have prevented risk-neutral homeowners from earning expected profits by selling their
homes and becoming renters for a year. Finally, computing implied appreciation as a residual yields a
house price forecast with huge errors; but either longer-horizon or no-real-capital-gains forecasts—
which turn out to have similar forecast errors—imply a far less divergent user cost measure which might
ultimately be useful for official price statistics. Some conjectures are offered.
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