What moves housing markets: A variance decomposition of the rent-price ratio

Sean D. Campbell, Morris A. Davis, Joshua Gallin, Robert F. Martin

Research output: Contribution to journalArticlepeer-review

171 Scopus citations


We apply the dynamic Gordon growth model to the housing market in 23 US metropolitan areas, the four Census regions, and the nation from 1975 to 2007. The model allows the rent-price ratio at each date to be split into the expected present discounted values of rent growth, real interest rates, and a housing premium over real rates. We show that housing premia are variable and forecastable and account for a significant fraction of rent-price ratio volatility at the national and local levels, and that covariances among the three components damp fluctuations in rent-price ratios. Thus, explanations of house-price dynamics that focus only on interest rate movements and ignore these covariances can be misleading. These results are similar to those found for stocks and bonds.

Original languageEnglish (US)
Pages (from-to)90-102
Number of pages13
JournalJournal of Urban Economics
Issue number2
StatePublished - Sep 2009
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Urban Studies


  • House prices
  • Housing rents
  • Interest rates
  • Rent-price ratio


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