Did changing rents explain changing house prices during the 1990s? Working Paper, American Real Estate and Urban Economics Association

House prices in the United States rose 14 percent in real terms during the 1990s; by historical standards, this was strong performance. Some analysts have worried that this performance was too strong, perhaps indicating an asset bubble, and could not be explained by fundamentals. This paper focuses on this relationship between rent and house value changes in 27 American metropolitan areas through 1998 using hedonic price and rental regressions on American Housing Survey Data to separate the extent to which house value and rent increases were due to changes in the quality of the housing stock, and how much were due to changes in price of housing services. We find that almost all of these markets demonstrated home value and rental growth during the 1990s that was well explained by economic fundamentals.