Household Income, Asset Location and Real Estate Value: Evidence from REITs

Abstract

This article investigates the extent to which the market valuation of properties is related to the income growth of their asset locations. Based on the income tax data from the Internal Revenue Service (IRS) and the individual property information of US equity real estate investment trusts (REITs) from 1995-2018, I construct an aggregated measure of income growth for each REIT based on its asset locations in different metropolitan areas. The results show that REITs’ market value and stock return are positively correlated with their previous-year household income growth. Further analysis provides evidence that income growth enhances shareholder value mainly through wages & salaries growth, not investment income growth. Moreover, firm-level operational efficiency is also found to be positively related to household income growth and wages & salaries growth. Additional tests such as splitting REITs into demand services and supply jobs subsample, controlling GDP growth and population growth, and analyzing real estate value growth at the MSA level are conducted. The results are largely consistent. Overall, these findings suggest that household income growth has a significant impact on real estate value and that the asset allocation strategy of a portfolio can play an important role in its long-term prospects.