House Prices, Local Demand, and Retail Prices / Johannes Stroebel, Joseph Vavra.

Format:

Book

Author/Creator:

Stroebel, Johannes.

Contributor:

National Bureau of Economic Research.

Vavra, Joseph.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20710.

NBER working paper series no. w20710

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

We use detailed micro data to document a causal response of local retail prices to changes in local house prices, with elasticities of 15%-20% across housing booms and busts. Notably, these price responses are largest in zip codes with many homeowners, and non-existent in zip codes with mostly renters. We provide evidence that these retail price responses are driven by changes in markups rather than by changes in local costs. We then argue that markups rise with house prices, particularly in high homeownership locations, because greater housing wealth reduces homeowners' demand elasticity, and firms raise markups in response. Consistent with this explanation, shopping data confirms that house price changes affect the price sensitivity of homeowners, but not that of renters. Our evidence suggests a new source of markup variation in business cycle models.

Notes:

Print version record

November 2014.