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Did easy credit lead to economic peril?: home equity borrowing and household behavior in the early 2000s


  • Daniel H. Cooper


Using data from the Panel Study of Income Dynamics, this paper examines how households' home equity extraction during 2001-to-2003 and 2003-to-2005 affected their spending and saving behavior. The results show that a one-dollar increase in equity extraction led to ninety-five or ninety-eight cents higher consumption expenditures. Nearly all of this spending increase was reversed in the subsequent period. A fair amount of these expenditures went toward home improvements and repairs. In addition, households used home equity to help finance their purchases of used cars. Equity extraction also led to some household balance sheet reshuffling. In particular, households who extracted equity were somewhat more likely than other households to pay down their higher-cost credit card debt and to invest in other real estate and businesses. Overall, the results in this paper are consistent with households' extracting equity during the first half of this decade to fund one-time durable good consumption needs.

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  • Daniel H. Cooper, 2009. "Did easy credit lead to economic peril?: home equity borrowing and household behavior in the early 2000s," Public Policy Discussion Paper 09-7, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbpp:09-7

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    References listed on IDEAS

    1. Atif Mian & Amir Sufi, 2008. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," NBER Working Papers 13936, National Bureau of Economic Research, Inc.
    2. Adelino, Manuel & Gerardi, Kristopher & Willen, Paul S., 2013. "Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 835-853.
    3. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    4. Christopher Mayer & Karen Pence & Shane M. Sherlund, 2009. "The Rise in Mortgage Defaults," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 27-50, Winter.
    5. Pennacchi, George G, 1988. " Loan Sales and the Cost of Bank Capital," Journal of Finance, American Finance Association, vol. 43(2), pages 375-396, June.
    6. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
    7. Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 389-411, June.
    8. Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1996. "Credit risk, credit scoring, and the performance of home mortgages," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 621-648.
    9. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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    Home equity loans ; Consumer behavior;

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