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House Prices, Local Demand, and Retail Prices

date Date: February 1, 2015
date Author(s): Johannes Stroebel, NYU Stern & CEPR Joseph Vavra
date Affiliation: New York University - University of Chicago
Abstract

We use detailed micro data to document a causal response of local retail prices to changes in house prices, with elasticities of 15%-20% across housing booms and busts. We provide evidence that our results are driven by changes in markups rather than by changes in local costs. We argue that this markup variation arises when increases in housing wealth reduce households’ demand elasticity, and firms raise markups in response. Consistent with this channel, price effects are larger in zip codes with many homeowners, and non-existent in zip codes with mostly renters. Shopping data confirms that house price changes have opposite effects on the price sensitivity of homeowners and renters. Our evidence has implications for monetary, labor and urban economics, and suggests a new source of markup variation in business cycle models.


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