Land, Landlords, and Local Capital in Housing Markets

Abstract

This thesis consists of three essays on the housing market, with a focus on how spatially induced constraints affect prices, investment, and supply. The first two chapters study household investors, who collectively own about half of all US residential rental units: their characteristics, impact on local markets, and the spatial dispersion in the returns they earn. Taken together, my results suggest an underappreciated role for landlords' investment decisions in shaping local prices, and strong barriers to arbitrage across space in this sector. In the first chapter, I show that higher wealth or propensity to invest among local household investors increases local housing prices and lowers returns. I document several new facts about these investors in the US, including that they are highly home-biased. I develop a novel model that fits these patterns and in which risk-averse investors price local rental properties in implicit local capital markets and under spatial equilibrium. A series of reduced-form tests confirm the model's comparative statics, using IV and shift-share designs. The second chapter complements the first by showing the extent to which rental yields diverge across space—both across and within cities—and that this dispersion primarily reflects dispersion in returns, not rent growth. The third chapter examines the effect of highway construction on the housing market, including housing supply and land prices, and the extent to which land availability mediates these effects, focusing on the Interstate Highway System (IHS). I find that highways drive population growth where land is abundant and lower prices where it is scarce. I then quantify the welfare and population effects of the IHS's housing market channel, finding large, though heterogeneous, gains. These findings highlight the potential housing market benefits of infrastructure projects when subsequent development is possible.