The impact of housing markets on consumer debt: credit report evidence from 1999 to 2012

We investigate the impact of large swings in the housing market on nonmortgage borrowing, including student, credit card, auto, and home equity debts. For this purpose, we use CoreLogic geographic house price variation, matched with rich data on consumer liabilities from the Equifax-sourced FRBNY Consumer Credit Panel. The length and timing of our panel allow us to study the consumer debt portfolio response to house price changes during a boom-and-bust cycle of historic magnitude as well as during more ordinary times. In first-differenced instrumental variables estimation, we find that during 1999-2001, homeowners substituted out of nonhousing (largely credit card) debt and into home equity-based debt at a nearly dollar-for-dollar rate in response to house price increases. During the housing boom of 2002-06, however, homeowners abandoned the practice of substituting into less costly debt as equity grew, and instead increased obligations across the board. From 2007-12, sample homeowners experienced a 23 percent average house price decline, and withdrew from home equity debt without adding to non-housing debt. We observe substantial heterogeneity in this pattern: Substitution in both 1999-2001 and 2007-12 ranges from 50 cents to more than dollar-for-dollar for older and prime borrowers, while the decidedly nonprime borrow more modestly, show less evidence of substitution, and shed large amounts of all types of debt from 2007-12. Finally, difference-in-differences and FD-IV estimates are consistent with both 1) a 2012 relative debt overhang of at least $1,800 on average, despite little remaining home equity advantage, for homeowners who experienced a more pronounced boom-and-bust cycle and 2) little substitution out of home equity debt into student loans in response to recent house price declines.