The relationship between house prices and rents - evidence from the U.S. housing market

This work develops and empirically tests an arbitrage argument for a relationship between house prices and rents. With quarterly frequency data for 44 US cities, it is shown that price-rent ratio is not an indicator of over-valuation in the housing markets. With the use of imputed rent-rent ratio, instead, in vector error correction impulse response analysis, it is argued that there is a substantial heterogeneity in the price-rent adjustments at the US housing market. Finally, Monte Carlo-bootstrap exercise suggest that while there is a long-run adjustment process for imputed rents there is not such one for rents.