Macroeconomic uncertainty and the comovement in buying versus renting in the USA

Abstract

This paper characterizes the sources of the comovement in the U.S metropolitan buy-rent growth rate. The analysis is based on quarterly buy-rent indices from 1982:Q1 to 2016:Q4. To this end, we used the dynamic factor model to decompose the index into national and local factors. The national component contributed more to the variation in the buy-rent indices relative to the local component with variance decomposition values of 72% and 27% respectively albeit this varied across the cities. We further examined the sensitivity of the national buy-rent factor to macroeconomic uncertainty. Our full sample results show that uncertainty has a significant negative effect on the buy-rent behavior thus favouring buying a home as a wealth accumulation channel and hence a hedge relative to renting a similar home and investing in other financial assets. The results from the recursive estimation further confirmed a dominant negative relationship with fewer periods of positive relationship. The implications of these findings are drawn.