Notes for April 9: Econ 210a: "Settler" Industrialization, 1700-1914
links for 2008-04-10

Richard Green on Real Rents

Richard Green writes:

Richard's Real Estate and Urban Economics Blog: Paul Krugman and Brad Delong have an argument about Rents: Krugman argues that house prices are fundamentally still too high, because CPI real rents have been flat. Delong says he is not sure what to make of CPI Rents. As I noted in a previous post, Ralph Turley, who knows more about these things than most all of us, argues that CPI rents are in fact measured incorrectly.

In a paper I did with Cutts and Chang (for which I must get around to doing the final revision), we performed hedonic regressions showing that quality adjusted rents during the 1990s in many cities did rise more rapidly than the CPI suggested. And when I look at rent to price ratios for comparable properties (i.e., condos and apartments) in, say, Los Angeles, the financial argument for owning seems pretty reasonable right now. Again, because we don't know how people are forming their expectations at the moment, it is difficult to say when a bottom is coming. But I do think equilibrium house prices are higher than Krugman thinks.