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Housing Wealth, Consumption Channels and Mortgage Liberalization

Author

Listed:
  • Lingxiao Li

    (California State University)

  • Bing Zhu

    (Technical University of Munich)

Abstract

This paper investigates two types of housing wealth effects: conventional housing wealth and collateral. We incorporate home equity extraction (HEE) and the influence of mortgage liberalization into the model in Campbell and Mankiw (1989). Based on U.S. data during the 1977Q1–2019Q4, our empirical results suggest that consumption is remarkably influenced by the use of HEE, rather than home equity. Furthermore, the rapid expansion of mortgage securitization significantly amplifies the collateral effect. Conditional on the use of HEE and the share of non-bank mortgage holdings, housing wealth has an average marginal propensity to consume (MPC) of 0.84 cents and a maximum MPC of 6.06 cents. In 2007, when market-based mortgage pools and issuers of asset-backed securities held more than 60% of home mortgages, the HEE shock explained for over 50% of the forecasting variance of consumption growth. The results provide evidence that with a focus on collateral value, lenders allow more equity withdrawal, which leads to higher consumption.

Suggested Citation

  • Lingxiao Li & Bing Zhu, 2020. "Housing Wealth, Consumption Channels and Mortgage Liberalization," International Real Estate Review, Global Social Science Institute, vol. 23(4), pages 433-465.
  • Handle: RePEc:ire:issued:v:23:n:04:2020:p:433-465
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption; Housing Wealth; Home Equity Extraction; Market-Based Mortgage Holdings; Time-Varying Cointegration.;
    All these keywords.

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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