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Housing Wealth Effects: The Long View

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We provide new time-varying estimates of the housing wealth effect back to the 1980s. We use three identification strategies: OLS with a rich set of controls, the Saiz housing supply elasticity instrument, and a new instrument that exploits systematic differences in city-level exposure to regional house price cycles. All three identification strategies indicate that housing wealth elasticities were if anything slightly smaller in the 2000s than in earlier time periods. This implies that the important role housing played in the boom and bust of the 2000s was due to larger price movements rather than an increase in the sensitivity of consumption to house prices. Full-sample estimates based on our new instrument are smaller than recent estimates, though they remain economically important. We find no significant evidence of a boom-bust asymmetry in the housing wealth elasticity. We show that these empirical results are consistent with the behavior of the housing wealth elasticity in a standard life-cycle model with borrowing constraints, uninsurable income risk, illiquid housing, and long-term mortgages. In our model, the housing wealth elasticity is relatively insensitive to changes in the distribution of LTV for two reasons: First, low-leverage homeowners account for a substantial and stable part of the aggregate housing wealth elasticity; Second, a rightward shift in the LTV distribution increases not only the number of highly sensitive constrained agents but also the number of underwater agents whose consumption is insensitive to house prices.

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  • Adam M. Guren & Alisdair McKay & Emi Nakamura & Jon Steinsson, 2020. "Housing Wealth Effects: The Long View," Staff Report 593, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:87573
    DOI: 10.21034/sr.593
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    More about this item

    Keywords

    Consumption; House prices; Leverage;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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