Puzzling Divergence of U.S. Rents and User Costs, 1980-2004: Summary and Extensions

This paper constructs, for the five largest cities in the United States, user costs and rents for the same structure, in levels (i.e., measured in dollars). The levels formulation is a major advantage over indexes since one can answer questions like "Is it cheaper to rent or to own?" or "Are houses overvalued?" because such questions are essentially about the levels of rents and house prices and their fundamentals. These new measures are constructed using Consumer Expenditure Survey (CE) Interview data from 1982 to 2002, along with house price appreciation forecasts from Verbrugge (2007a). Characteristics, current market value, and rental equivalence of owner-occupied housing are used in a regression framework to predict the rent associated with a structure with median characteristics in each city. The property value of this median house is used to construct a user cost estimate for this structure. We find that, for the median structure in each city, estimated user costs and rents diverge to a surprising degree, in keeping with the previously noted findings of Verbrugge (2007a). It is not always cheaper to own: user costs sometimes lie well above rents. Finally, the dynamics of the estimated price-to-rent ratio are generally similar to those found in conventional estimates based upon indexes, suggesting that the present study might be useful for scaling or normalizing other estimates.