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Is Housing Wealth a Sideshow?

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  • Jonathan Skinner

Abstract

Do housing price fluctuations play an important role in the economic security of retirees, or is housing wealth just a sideshow to the determination of consumption and saving? Using panel data on saving from the Panel Study of Income Dynamics, and aggregate time- series data, I find that shifts in housing wealth do affect consumption and saving, especially for younger households. On the other hand, few elderly households appear to be tapping into their housing windfalls to finance retirement consumption. The precautionary saving approach can explain this puzzle. If housing wealth rises, households require less insurance against future contingencies, and will respond by spending more out of (nonhousing) wealth. But not every elderly household encounters a bad outcome requiring the liquidation of household equity. Hence the median elderly family will not actively spend housing windfalls. The theoretical and empirical results therefore suggest that housing wealth is not a sideshow.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4552.

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Date of creation: Nov 1993
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Publication status: published as D. Wise, ed., Advances in the Economics of Aging. Chicago: University of Chicago Press, 1996, pp. 241-268.
Handle: RePEc:nbr:nberwo:4552

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  1. Joyce M. Manchester & James M. Poterba, 1989. "Second Mortgages and Household Saving," NBER Working Papers, National Bureau of Economic Research, Inc 2853, National Bureau of Economic Research, Inc.
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  15. Christopher D. Carroll & Andrew A. Samwick, 1992. "The nature and magnitude of precautionary wealth," Working Paper Series / Economic Activity Section, Board of Governors of the Federal Reserve System (U.S.) 124, Board of Governors of the Federal Reserve System (U.S.).
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  17. Caballero, Ricardo J, 1991. "Earnings Uncertainty and Aggregate Wealth Accumulation," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 859-71, September.
  18. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
  19. Chunrong Ai & Jonathan Feinstein & Daniel L. McFadden & Henry Pollakowski, 1990. "The Dynamics of Housing Demand by the Elderly: User Cost Effects," NBER Chapters, National Bureau of Economic Research, Inc, in: Issues in the Economics of Aging, pages 33-88 National Bureau of Economic Research, Inc.
  20. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 26(4), pages 609-43, October.
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