RDP 2016-04: Housing Prices, Mortgage Interest Rates and the Rising Share of Capital Income in the United States 6. Conclusion

I provide evidence that the secular increase in housing's share of the US economy reflects a combination of lower interest rates and housing supply constraints. More specifically, by decomposing the national accounts and exploiting variation across states, I provide evidence that the rise in the share of housing capital income in recent decades can be traced to: 1) both disinflation and lower real interest rates (which contributed to an expansion of credit for owner-occupied housing); and 2) constraints on the supply of new housing in some large cities. The evidence I uncover is consistent with the hypothesis that disinflation and financial deregulation acted as aggregate demand shocks to push up the relative price of land in supply-constrained areas, which, in turn, contributed to a higher share of nominal income spent on housing.

The results in this paper relate specifically to the United States, but it would be interesting to examine whether similar stories can be told for other advanced economies, given that the long-run increase in the share of housing capital income has occurred across a range of economies (Rognlie 2015). In particular, future research could examine the determinants of housing capital income by exploiting the cross-country variation in the institutional arrangements within mortgage and rental markets.

The analysis in this paper highlights the important role of housing values in not only the distribution of wealth, but also the distribution of income in the United States. The observed increase in the share of aggregate income going to housing capital might even understate the importance of housing prices to the income distribution. As shown in the introduction of this paper, the non-housing capital income share has been stable for several decades. But, within the non-housing sector, there has been an increase in the share of capital income going to financial corporations (Figure 10). A large share of the income flowing to the financial sector is presumably related to the growth in intermediation services; services which are traditionally dependent on housing collateral, and ultimately land prices.

Figure 10: Non-housing Capital Income
Share of net domestic income
Figure 10: Non-housing Capital Income

Source: Bureau of Economic Analysis

My results also potentially speak to a new literature on the distributional effects of monetary policy. This literature is still in its infancy, but it is surprising how little research there has been on the link between monetary policy and inequality via the housing sector. As is well known, for most advanced economies, housing typically makes up the largest share of total wealth for most households. Moreover, imputed rent for owner-occupiers often makes up the largest share of total household spending in the national accounts. The link between monetary policy and inequality via housing prices and imputed rent should be a fruitful area of future research.