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Housing over time and over the life cycle: a structural estimation

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  • Wenli Li
  • Haiyong Liu
  • Rui Yao

Abstract

We estimate a structural model of optimal life-cycle housing and consumption in the presence of realistic labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consumption, and explicitly incorporates a house adjustment cost. Our estimation fits the cross-sectional and time-series household wealth and housing profiles from the Panel Study of Income Dynamics quite well, and suggests an intra-temporal elasticity of substitution between housing and nonhousing consumption of 0.33 and a housing adjustment cost that amounts to about 15 percent of house value. Policy experiments with estimated preference parameters imply that households respond nonlinearly to house price changes with large house price declines leading to sizable decreases in both the aggregate homeownership rate and aggregate non-housing consumption. The average marginal propensity to consume out of housing wealth changes ranges from 0.4 percent to 6 percent. When lending conditions are tightened in the form of a higher down payment requirement, interestingly, large house price declines result in more severe drops in the aggregate homeownership rate but milder decreases in nonhousing consumption.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 09-7.

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Date of creation: 2009
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Handle: RePEc:fip:fedpwp:09-7

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Cited by:
  1. Song, In Ho, 2010. "House Prices and Consumption," MPRA Paper 27481, University Library of Munich, Germany.
  2. Dmytro Hryshko & María José Luengo-Prado. & Bent E. Sørensen, 2009. "House prices and risk sharing," New England Public Policy Center Working Paper 09-3, Federal Reserve Bank of Boston.
  3. Steven Laufer, 2013. "Equity extraction and mortgage default," Finance and Economics Discussion Series 2013-30, Board of Governors of the Federal Reserve System (U.S.).

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