Event Details

Economic Research Seminar

Abtract: Although real U.S. house prices boomed by similar amounts in both the early 2000s and in the years following the outbreak of the Covid-19 pandemic, the relative roles of factors driving those booms differed. Our econometric model indicates that the former boom was set in motion by higher demand arising from a combination of low interest rates and weaker mortgage credit standards. In contrast, the more recent boom arose from higher housing demand—stemming from lower mortgage interest rates and a pandemic-related rise in the demand for housing associated with increased work-from-home (WFH)—pressing up against a less elastic supply of housing, with many homeowners reluctant to sell because they locked in low fixed-rate mortgages early in the pandemic. In both episodes, extrapolative house price expectations amplified demand effects. We establish these results using a house price-to-rent framework. Our quarterly data span four decades, which allows us to estimate the determinants of the long-run house price-to-rent ratio, and its dynamic behavior over several business cycles. While much of the house price increases this decade was induced by low interest rates prior to March 2022, the rise in WFH and mortgage rate lock-in effects prevented most of this run-up from unwinding. The model results suggest that the deviation of the house price-to-rent ratio from its longer-run, fundamental value is moderate.