Reconciling user costs and rental equivalence: Evidence from the US consumer expenditure survey

Our findings are striking. In keeping with most previous research, we find tremendous divergence between conventional measures of user costs and net rents, thus ruling out index construction errors as a possible explanation. This divergence does not result from a faulty rent measure: we find that reported rents are sensible, in that they move similarly to official rent indexes, and are not simply out-of-pocket expenses. Instead, and most perplexing, we find a surprisingly close correspondence between net rents and a particular estimate of user costs, one implicitly assuming zero transactions costs and constructed using an appreciation measure that is both theoretically suspect and empirically a poor predictor of actual appreciation.