Business

When house prices rise, so do retail prices

By John Hintze     
June 11, 2015

From: Magazine

Housing prices in the United States rose by 6 percent in 2014, according to online real-estate database Zillow.com. The company's economists anticipate prices will increase further this year. And that may mean retail prices are going to rise, too.

Higher home prices lead to higher household spending, according to recent academic research. But New York University's Johannes Stroebel and Chicago Booth's Joseph S. Vavra argue that rising prices also lead to retail price inflation. And they say this is something monetary policymakers need to keep in mind.

Stroebel and Vavra use bar-code-level price data from 2,400 US zip codes on a variety of products in 31 product categories, mostly items found in grocery stores and drug stores. They find that when local house prices double, product prices in the area increase by 15 to 20 percent.

Why? When house prices rise, homeowners feel wealthier and pay less attention to prices. Retailers, say the researchers, increase their markups as a result. Vavra and Stroebel see this effect only in areas with large proportions of homeowners—rising home prices don't have the same effect on renters.

There is a potential upside for retail business-owners: if a store-owner sees local home prices go up significantly, he or she should consider raising prices, since the data suggest other retailers are doing just that. "If you're not responding to this," says Vavra, "then you're basically leaving money on the table."

Work cited

Johannes Stroebel and Joseph S. Vavra, "House Prices, Local Demand, and Retail Prices," Working paper, April 2015.

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