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The Housing Wealth Effect: The Crucial Roles of Demographics, Wealth Distribution and Wealth Shares

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  • Calomiris, Charles W.
  • Longhofer, Stanley D.
  • Miles, William

Abstract

Current estimates of housing wealth effects vary widely. We consider the role of omitted variables suggested by economic theory that have been absent in a number of prior studies. Our estimates take into account age composition and wealth distribution (using poverty rates as a proxy), as well as wealth shares (how much of total wealth is comprised of housing vs. stock wealth). We exploit cross-state variation in housing, stock wealth and other variables in a newly assembled panel data set and find that the impact of housing on consumer spending depends crucially on age composition, poverty rates, and the housing wealth share. In particular, states with more young people who are more likely to be credit-constrained, and older homeowners, likely to be "trading down" on their housing stock, experience the largest housing wealth effects, as suggested by theory. Also, as suggested by theory, housing wealth effects are higher in state-years with higher housing wealth shares, and in state-years with higher poverty rates (likely reflecting the greater importance of credit constraints for those observations). Overall, we estimate the average housing wealth effect to be approximately 8.1 cents per dollar. However, consistent with theory, demographic and wealth characteristics of the population cause this effect to vary widely across states and over time.

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File URL: http://dx.doi.org/10.1561/104.00000008
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Bibliographic Info

Article provided by now publishers in its journal Critical Finance Review.

Volume (Year): 2 (2013)
Issue (Month): 1 (July)
Pages: 049-099

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Handle: RePEc:now:jnlcfr:104.00000008

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  1. Paul Jenkins & Carl E. Walsh, 1985. "Real Interest Rate, Credit Markets, and Economic Stabilization," NBER Working Papers 1575, National Bureau of Economic Research, Inc.
  2. Ana M. Aizcorbe & Arthur B. Kennickell & Kevin B. Moore, 2003. "Recent changes in U.S. family finances: evidence from the 1998 and 2001 Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-32.
  3. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jirka, 2006. "How large is the housing wealth effect? A new approach," CFS Working Paper Series 2006/35, Center for Financial Studies (CFS).
  4. Aron, Janine & Muellbauer, John & Murphy, Anthony, 2006. "Housing wealth, credit conditions and consumption," MPRA Paper 24485, University Library of Munich, Germany.
  5. Sydney Ludvigson & Charles Steindel, 1998. "How important is the stock market effect on consumption?," Research Paper 9821, Federal Reserve Bank of New York.
  6. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2012. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series qt6px1d1sc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Bostic, Raphael & Gabriel, Stuart & Painter, Gary, 2009. "Housing wealth, financial wealth, and consumption: New evidence from micro data," Regional Science and Urban Economics, Elsevier, vol. 39(1), pages 79-89, January.
  8. Juan Contreras & Joseph Nichols, 2010. "Consumption responses to permanent and transitory shocks to house appreciation," Finance and Economics Discussion Series 2010-32, Board of Governors of the Federal Reserve System (U.S.).
  9. Orazio Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2005. "Consumption, house prices and expectations," Bank of England working papers 271, Bank of England.
  10. Arthur B. Kennickell & Martha Starr-McCluer & Brian J. Surette, 2000. "Recent changes in U. S. family finances: results from the 1998 Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-29.
  11. Karl E. Case & John M. Quigley & Robert J. Shiller, 2011. "Wealth Effects Revisited 1978-2009," NBER Working Papers 16848, National Bureau of Economic Research, Inc.
  12. Arthur B. Kennickell & Martha Starr-McCluer & Annika E. Sunden, 1997. "Family finances in the U.S.: recent evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-24.
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