Peak-Bust rental spreads

Landlords appear to use stale information when setting rents. Among over 43,000 California rental houses in 2018–2019, those last purchased during 2005–2007 (the peak) rent for 2–3% more than those purchased during 2008–2010 (bust). Neither house nor landlord characteristics explain this “peak-bust...

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Bibliographic Details
Published in:Journal of financial economics 2022-01, Vol.143 (1), p.504-526
Main Authors: Giacoletti, Marco, Parsons, Christopher A.
Format: Article
Language:English
Subjects:
Distorted beliefs
Houses
Landlords
Liquidity constraints
Payments
Prices
Prospect theory
Real estate sales
Rentals
Rents
Residential rents
Sales
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Summary:Landlords appear to use stale information when setting rents. Among over 43,000 California rental houses in 2018–2019, those last purchased during 2005–2007 (the peak) rent for 2–3% more than those purchased during 2008–2010 (bust). Neither house nor landlord characteristics explain this “peak-bust rental spread.” To clarify the mechanism, we test cross-sectional predictions from a simple theory of rent-setting. We find empirical support for both reference dependence and distorted beliefs. In the first, monthly payments establish (recurring) reference points, against which gains or losses are measured. In the second, past sales prices distort landlords’ current estimates of house values/rents.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2021.05.061