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Tracking and stress-testing U.S. household leverage

Author

Listed:
  • Andreas Fuster
  • Benedict Guttman-Kenney
  • Andrew F. Haughwout

Abstract

Housing equity is an important component of borrowers? wealth and a critical determinant of their vulnerability to shocks. In this article, the authors use a unique, newly created data set to analyze the evolution of household leverage?defined here as the ratio of housing debt to housing values?over time and across locations in the United States, at the micro level. They find that leverage was at a very low point just prior to the large declines in house prices that began in 2006, and rose very quickly through 2012, in spite of reductions in housing debt. As of early 2017, leverage statistics were falling back toward their pre-crisis levels, reflecting a more than 30 percent increase in home prices nationally since 2012. Using borrower-level leverage measures and another unique feature of the data?updated borrower credit scores?the authors conduct ?stress tests? in which they project leverage and defaults under various adverse house price scenarios. They find that while the riskiness of the household sector has declined significantly since 2012, when home prices were at their low, the sector remains vulnerable to very severe declines in house prices.

Suggested Citation

  • Andreas Fuster & Benedict Guttman-Kenney & Andrew F. Haughwout, 2018. "Tracking and stress-testing U.S. household leverage," Economic Policy Review, Federal Reserve Bank of New York, issue 24-1, pages 35-63.
  • Handle: RePEc:fip:fednep:00046
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    References listed on IDEAS

    as
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Assessing Housing Risk
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-10-15 11:28:50

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    Cited by:

    1. Jesse Bricker & Kevin B. Moore & Jeffrey P. Thompson, 2019. "Trends in household portfolio composition," Working Papers 19-9, Federal Reserve Bank of Boston, revised 01 Sep 2019.
    2. Neil Bhutta & Jesse Bricker & Lisa J. Dettling & Jimmy Kelliher & Steven Laufer, 2019. "Stress Testing Household Debt," Finance and Economics Discussion Series 2019-008, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    mortgages; stress testing; leverage;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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