Case Study 1 — Why Millbrook Rents Rose 17% in One Year

In the fall of 2024, the median rent for a 1-bedroom apartment within walking distance of Millbrook State University was $1,200/month. By the fall of 2025, it was $1,400 — a 17% increase in twelve months. National rent inflation over the same period was about 4%. So Millbrook rents rose four times faster than the national average. What happened?

This case study walks through the rent increase using the supply-and-demand framework from Chapter 5. The point is not just to explain Millbrook (which is a fictional town in any case) but to show what the analytical procedure looks like when applied to a real-feeling market with several things changing at once. By the end of the case study, you should be able to do the same analysis for your own city if rents in your city changed.

Setting the stage: the Millbrook student housing market in 2024

Before we get to the changes, let's understand the baseline. In fall 2024, the Millbrook off-campus student housing market had roughly:

• 8,500 rental units (mostly 1-bedroom and 2-bedroom apartments, plus some shared houses) within a 1.5-mile radius of MSU's main campus
• About 7,800 of these units occupied, mostly by MSU students plus a smaller share of MSU staff and Millbrook residents who were not affiliated with the university
• Median 1-bedroom rent: $1,200/month
• Median 2-bedroom rent: $1,650/month
• Vacancy rate: about 8% (meaning 700 units sat empty at any given time, mostly because of timing — between leases — rather than because no one wanted them)

The housing market was tight but not catastrophic. Some students complained about prices; others felt rents were comparable to other Midwestern college towns. The market was approximately in equilibrium.

What changed between fall 2024 and fall 2025

Several things changed simultaneously over the academic year, all of which mattered for the housing market:

Change 1 — MSU enrollment. MSU expanded its undergraduate data science program, attracting 1,200 new applicants and increasing total undergraduate enrollment by about 800 (some students transferred in; others enrolled as new freshmen). The graduate school also added 200 new students.

Change 2 — A new dorm. MSU completed and opened "Walden Hall," a 400-bed undergraduate dormitory, in August 2025. The dorm was built specifically to accommodate the data science program's growth — but it accommodated only half the new enrollment and didn't include any space for graduate students.

Change 3 — A complex closed for renovation. The Cedarwood Apartment Complex, with 200 units, was sold to a new owner who immediately closed the buildings for an 18-month renovation. The owner's plan was to upgrade the units to "luxury" standards and re-rent them at higher prices. For the academic year 2025–26, those 200 units were unavailable.

Change 4 — Higher mortgage interest rates. Federal Reserve interest rate policy pushed 30-year fixed mortgage rates from about 5% in early 2024 to about 7% by mid-2025. For landlords with adjustable-rate financing or who needed to refinance, this raised their monthly costs significantly.

Change 5 — Property tax reassessment. Walden County completed a property tax reassessment in early 2025. The new assessments raised property tax bills for most rental properties by about 8% on average — a few hundred dollars per month per unit for many landlords.

Change 6 — A new minimum wage in Walden County. The county council passed a $14/hour minimum wage that took effect in March 2025. For property managers and maintenance workers earning at or near the minimum, the wage increase translated into higher operating costs for landlords.

That's six changes, all real, all happening within twelve months. To analyze the effect on the equilibrium, we sort them into demand shifters and supply shifters.

Sorting the changes

Demand shifters:

Net effect on demand: 1,000 new students — 400 new dorm beds = 600 net additional students who need off-campus housing. Demand shifts right by approximately 600 units.

Supply shifters:

Net effect on supply: all four changes shift supply left. Supply shifts left significantly.

Predicting the new equilibrium

When demand shifts right and supply shifts left, the equilibrium price unambiguously rises. The effect on equilibrium quantity depends on which shift is bigger. In this case:

• Demand shifted right by approximately 600 units
• Supply shifted left by approximately 200 (Cedarwood closure) + some additional unmeasured amount from the cost increases

If we estimate the cost-driven supply shift conservatively (say, 100 units of effective supply lost because the higher costs made some marginal units uneconomical), the total supply shift left is about 300 units.

The demand shift (right by 600) is bigger than the supply shift (left by 300). So equilibrium quantity should rise — but only modestly, because supply also got worse.

Predicted vs. actual

Predicted price change: rents rise (clearly). Actual price change: rents rose from $1,200 to $1,400 (+17%). ✓

Predicted quantity change: number of rented apartments rises slightly. Actual quantity change: the number of occupied rental units fell from 7,800 to 7,500. ✗

Wait — the prediction got the direction of the quantity change wrong. What did we miss?

We missed that supply shifted left by more than we estimated. The Cedarwood closure was the visible supply shock (200 units), but the cost-driven supply contraction was much larger. When mortgage rates rose, property taxes rose, and the minimum wage took effect, several small landlords decided to sell their rental properties — sometimes to single-family home buyers — taking those units out of the rental market entirely. The number of units leaving the rental supply for cost reasons was about 400, not 100.

Total supply shift: 200 (Cedarwood) + 400 (small landlord exits) = 600 units left. Total demand shift: 600 units right.

Now the two shifts are roughly equal in magnitude, with supply moving left and demand moving right. In that case, the equilibrium quantity is approximately unchanged (or maybe falls slightly) and the price rises. The actual outcome — quantity slightly down, rent significantly up — matches the corrected prediction.

The lesson: the model worked, but only after we paid attention to all the shifts, including the harder-to-observe ones (small landlord exits driven by cost pressures). Initial predictions in real markets often miss things that turn out to matter. Honest analysis updates the prediction when new information arrives.

Who got hurt and who benefited

The supply-and-demand model tells you about price and quantity. It does not, by itself, tell you about distribution. Let's add that layer.

Renters (mostly MSU students): the typical 1-bedroom renter saw their monthly rent rise by $200. Annualized, that's $2,400 per renter. Across the 7,500 occupied units, that's about $18 million more in rent paid by Millbrook tenants in the academic year 2025–26 than in 2024–25. Some of this got absorbed by parental contributions, some by additional student loans, some by tighter budgets. Some students who could not absorb the increase moved further from campus, took on more roommates, or moved back home and commuted.

Landlords: landlords whose rental properties remained on the market collected the higher rents. But many of them also faced significantly higher costs (mortgage interest, property taxes, wages). On net, for the typical landlord with a mortgage and average operating costs, the rent increase roughly covered the cost increases — they were no worse off than before, but not much better off either. The exception: landlords who owned their properties outright (no mortgage), who collected most of the rent increase as additional profit. The cost increases hit leveraged landlords much harder than unleveraged ones.

Small landlords who exited the market: the 400 units of net exit represented landlords who decided that owning rental property was no longer profitable enough. Many sold to single-family home buyers (at decent prices, given the housing market). They moved their capital out of the rental business. In the long run, these units may come back into the rental market under different ownership, but in the short run they were lost.

The housing market as a whole: the rent increase plus the unit reduction means that the welfare of Millbrook renters fell, even though the market continued to function. Some students who would have rented at $1,200 chose to live elsewhere or to share apartments rather than rent at $1,400. We will see in Chapter 8 how to measure this welfare loss using the concept of consumer surplus.

What the case study illustrates

Several lessons that will recur throughout the rest of the book:

Lesson 1 — Supply and demand really does work for predicting markets. With the right inputs, the model gave a roughly correct prediction of what happened. It wasn't precise (we got the magnitude of supply shift wrong initially), but it was directionally right and got refined when more information was added.

Lesson 2 — Real markets often have multiple changes happening at once. The Millbrook story involved six distinct shocks to demand and supply within a single year. Sorting through all of them and predicting the net effect is the kind of work that supply-and-demand analysis is designed to do.

Lesson 3 — The model tells you about price and quantity, not distribution. The fact that rents rose by $200 doesn't tell you who pays the cost. The cost was paid by students who became poorer, by landlords with mortgages who saw cost increases roughly equal to rent increases, and by would-be tenants who couldn't find apartments at any price. Distributional questions require additional analysis.

Lesson 4 — Some causes of market change are visible (the Cedarwood closure) and some are invisible (small landlords exiting). Honest analysis tries to account for all of them, including the ones that don't make the news.

Lesson 5 — The political response to a rent increase often misses the underlying causes. A tempting policy response in Millbrook would be to impose rent control. We will see in Chapter 7 why that response would probably make the situation worse, not better — because it doesn't address the underlying supply and cost shocks. The right responses (zoning reform, faster permitting, lower property taxes on rentals, more dorms) are politically harder but more effective.

We'll come back to all of this. For now, the key takeaway is that the supply-and-demand framework gave us a structured way to analyze a real market, predict the change, and explain what happened. That is what economic models are for.

Discussion questions

1. The case study found that supply shifted left by more than initially predicted because small landlords exited the market. How could we have predicted this in advance? What evidence would have suggested the size of the cost-driven supply shock?
2. The case study mentions that the Cedarwood complex was sold for renovation and is expected to come back as luxury apartments at higher prices in 18 months. What does the model predict will happen to rents at the bottom of the market when those units come back at higher prices? What about rents in the middle?
3. If you were the city council in Walden County, what policy would you propose to address the rent increase? Use supply and demand to evaluate your proposal. Would it work? At what cost?
4. The case study notes that some students absorbed the rent increase by parental contributions, additional student loans, or moving further from campus. From a policy perspective, how should we think about students who took on more debt to stay in expensive housing? Is that a problem the city should care about?
5. Repeat the analysis for a city you actually know. What changes have happened in its housing market in the last year or two? Which were demand shifters? Which were supply shifters? What does your analysis predict, and what actually happened?