Length-of-Residence Discounts and Rental Housing Demand: Theory and Evidence

The improved availability of crosssectional household level data over the past decade has led to substantive improvements in estimates of housing demand. Better techniques have been developed to measure permanent income and housing price, to determine proper functional forms for demand equations, and to consider the endogenous nature of the mobility (move/non-move) and/ or the tenure (own/rent) decision. This paper examines two rental housing market features which have been alluded to elsewhere, but which have not received systematic attention. First, many analysts have estimated substantial length-of-residence discounts (for example, Merrill 1977; Lowery 1980; Follain and Malpezzi 1980; Downs 1980; and Marshall and Guasch 1983; 35778). These discounts are consistent with several explanations, including turnover minimization by landlords, screening of good tenants, or sample truncation due to random error in the setting of rental prices. Irrespective of the source, they imply that any crosssection sample of tenants will indicate rental prices that decrease, all else equal, with length of residence. Their pervasive nature suggests that they will be expected by consumers, who will act accordingly in housing demand decisions. This consumer optimization is the second feature of the analysis, in what might be termed the equilibrium-disequilibrium question. The substantial search and moving costs that often accompany a housing purchase suggest that the random cross-sectional