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The (Mythical?) Housing Wealth Effect

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  • Charles Calomiris
  • Stanley D. Longhofer
  • William Miles

Abstract

Models used to guide policy, as well as some empirical studies, suggest that the effect of housing wealth on consumption is large and greater than the wealth effect on consumption from stock holdings. Recent theoretical work, in contrast, argues that changes in housing wealth are offset by changes in housing consumption, meaning that unexpected shocks in housing wealth should have little effect on non-housing consumption. We reexamine the impact of housing wealth on non-housing consumption, employing the Case-Quigley-Shiller data on U.S. housing wealth that have been used in prior studies to estimate a large housing wealth effect. Existing empirical work fails to control for the fact that changes in housing wealth may be correlated with changes in expected permanent income, biasing the resulting estimates. Once we control for the endogeneity bias resulting from the correlation between housing wealth and permanent income, we find that housing wealth has a small and insignificant effect on consumption. Additional analysis of time-series results provides further support for that view.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15075.

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Date of creation: Jun 2009
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Handle: RePEc:nbr:nberwo:15075

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  1. Frederic S. Mishkin, 2007. "Housing and the Monetary Transmission Mechanism," NBER Working Papers 13518, National Bureau of Economic Research, Inc.
  2. 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.
  3. Levin, Laurence, 1998. "Are assets fungible?: Testing the behavioral theory of life-cycle savings," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 59-83, July.
  4. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," Economics Working Paper Archive 535, The Johns Hopkins University,Department of Economics.
  5. Buiter, Willem H., 2010. "Housing wealth isn't wealth," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 4(22), pages 1-29.
  6. Orazio P. Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2009. "Booms and Busts: Consumption, House Prices and Expectations," Economica, London School of Economics and Political Science, vol. 76(301), pages 20-50, 02.
  7. Muellbauer, John, 2008. "Housing, Credit and Consumer Expenditure," CEPR Discussion Papers 6782, C.E.P.R. Discussion Papers.
  8. Richard K. Green, 1996. "Follow the Leader: How Changes In Residential and Non-Residential Investment Predict Changes in GDP," Wisconsin-Madison CULER working papers 96-05, University of Wisconsin Center for Urban Land Economic Research.
  9. Sydney Ludvigson & Charles Steindel, 1998. "How important is the stock market effect on consumption?," Research Paper 9821, Federal Reserve Bank of New York.
  10. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
  11. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  12. Alan J. Auerbach & Kevin Hassett, 1991. "Corporate Savings and Shareholder Consumption," NBER Chapters, in: National Saving and Economic Performance, pages 75-102 National Bureau of Economic Research, Inc.
  13. Gauger, Jean & Snyder, Tricia Coxwell, 2003. "Residential Fixed Investment and the Macroeconomy: Has Deregulation Altered Key Relationships?," The Journal of Real Estate Finance and Economics, Springer, vol. 27(3), pages 335-54, November.
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Cited by:
  1. 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.).
  2. Guglielmo Maria Caporale & Ricardo M. Sousa, 2011. "Consumption, Wealth, Stock and Housing Returns: Evidence from Emerging Markets," NIPE Working Papers 32/2011, NIPE - Universidade do Minho.
  3. Ricardo M. Sousa, 2005. "Consumption, (Dis) Aggregate Wealth and Asset Returns," NIPE Working Papers 9/2005, NIPE - Universidade do Minho.
  4. Christopher D. Carroll & Misuzu Otsuka & Jiri Slacalek, 2010. "How large are housing and financial wealth effects? A new approach," Working Paper Series 1283, European Central Bank.
  5. Barry Bosworth & Rosanna Smart, 2009. "The Wealth of Older Americans and the Sub-Prime Debacle The Wealth of Older Americans and the Sub-Prime Debacle," Working Papers, Center for Retirement Research at Boston College wp2009-21, Center for Retirement Research, revised Nov 2009.
  6. Alessio Ciarlone, 2012. "Wealth effects in emerging economies," Temi di discussione (Economic working papers) 843, Bank of Italy, Economic Research and International Relations Area.

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