Keywords: House prices, housing, equity premium
Abstract: Many recent papers have claimed that when housing services are
treated separately from other forms of consumption in utility, a wide
range of economic puzzles such as the equity premium puzzle can be explained.
Our paper challenges these claims. The key assumption embedded in this
literature is that households are not very willing to substitute housing
services for consumption. We show that housing services and consumption must
be much more substitutable than has been assumed for a neoclassical consumption
model to be consistent with U.S. house price data. Further, when forced to match
both historical house prices and stock returns, the lowest risk-free rate
the model can generate is 11 percent.
Full paper (475 KB PDF)
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Last update: March 7, 2005