Did the Housing Boom Increase Household Spending?

Between 1995 and 2007, inflation-adjusted house prices more than doubled in some areas of the United States. During this unprecedented boom, households spent more and reduced their saving rate. A key question is how much of the increased spending was related to rising house prices, as opposed to other factors? And, if households spent more when prices soared, are they likely to cut back during the housing bust? The answers can help in assessing retirement saving trends. This brief uses the Health and Retirement Study to examine the spending behavior of older households during the housing boom and subsequent bust. It compares changes in spending on non-durable goods (e.g., meals out, vacations, and entertainment) of households in areas with rapid growth in house prices to those in areas with relatively stable prices. The results show that rising house prices led to a modest increase in annual consumption that, if sustained over time, could eat up a significant portion of the gain. Interestingly, the study also finds that house­holds experiencing a decline in house prices do not correspondingly reduce their consumption. This brief is organized as follows. The first section covers the economic intuition behind how house­holds might react to changes in house prices. The second section describes the data and methodology. The third section presents the results. The final section concludes that households may undermine their retirement security if they spend their gains but ignore their losses.