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Housing over time and over the life cycle: a structural estimation

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  • Wenli Li
  • Haiyong Liu
  • Rui Yao

Abstract

Superseded by Working Paper 15-04. We estimate a structural model of optimal life-cycle housing and consumption in the presence of realistic labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consumption, and explicitly incorporates a house adjustment cost. Our estimation fits the cross-sectional and time-series household wealth and housing profiles from the Panel Study of Income Dynamics quite well, and suggests an intra-temporal elasticity of substitution between housing and nonhousing consumption of 0.33 and a housing adjustment cost that amounts to about 15 percent of house value. Policy experiments with estimated preference parameters imply that households respond nonlinearly to house price changes with large house price declines leading to sizable decreases in both the aggregate homeownership rate and aggregate non-housing consumption. The average marginal propensity to consume out of housing wealth changes ranges from 0.4 percent to 6 percent. When lending conditions are tightened in the form of a higher down payment requirement, interestingly, large house price declines result in more severe drops in the aggregate homeownership rate but milder decreases in nonhousing consumption.

Suggested Citation

  • Wenli Li & Haiyong Liu & Rui Yao, 2009. "Housing over time and over the life cycle: a structural estimation," Working Papers 09-7, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:09-7
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    Cited by:

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    3. Hedlund, Aaron, 2016. "Illiquidity and its discontents: Trading delays and foreclosures in the housing market," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 1-13.
    4. Steven Laufer, 2018. "Equity Extraction and Mortgage Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 1-33, April.
    5. Aaron Hedlund, 2014. "The Cyclical Dynamics of Illiquid Housing, Debt, and Foreclosures," Working Papers 1416, Department of Economics, University of Missouri.
    6. Carlos Hatchondo, Juan & Martinez, Leonardo & Sánchez, Juan M., 2015. "Mortgage defaults," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 173-190.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis.
      • Mr. Leonardo Martinez & Juan Carlos Hatchondo & Mr. Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 2012/026, International Monetary Fund.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2015. "Mortgage Defaults," CAEPR Working Papers 2015-011, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    7. Hernan Winkler, 2011. "The Effect of Homeownership on Geographic Mobility and Labor Market Outcomes," 2011 Meeting Papers 196, Society for Economic Dynamics.
    8. Zhifeng Cai, 2020. "Secular Stagnation, Financial Frictions, and Land Prices," Departmental Working Papers 202001, Rutgers University, Department of Economics.
    9. Aaron Hedlund, 2018. "Down Payments and the Homeownership Dream: Not Such a Barrier After All?," Working Papers 1806, Department of Economics, University of Missouri.
    10. Djajić, Slobodan & Vinogradova, Alexandra, 2015. "Overshooting the Savings Target: Temporary Migration, Investment in Housing and Development," World Development, Elsevier, vol. 65(C), pages 110-121.
    11. Määttänen, Niku & Terviö, Marko, 2014. "Income distribution and housing prices: An assignment model approach," Journal of Economic Theory, Elsevier, vol. 151(C), pages 381-410.
    12. Khorunzhina, Natalia, 2021. "Intratemporal nonseparability between housing and nondurable consumption: Evidence from reinvestment in housing stock," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 658-670.
    13. Hryshko, Dmytro & José Luengo-Prado, María & Sørensen, Bent E., 2010. "House prices and risk sharing," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 975-987, November.
    14. Hedlund, Aaron, 2018. "Credit constraints, house prices, and the impact of life cycle dynamics," Economics Letters, Elsevier, vol. 171(C), pages 202-207.
    15. Song, In Ho, 2010. "House Prices and Consumption," MPRA Paper 27481, University Library of Munich, Germany.
    16. Jordan Rappaport, 2014. "A quantitative system of monocentric metros," Research Working Paper RWP 14-3, Federal Reserve Bank of Kansas City.
    17. Khorunzhina, Natalia, 2018. "Intratemporal Substitution between Housing and Nondurable Consumption: Evidence from Reinvestment in Housing Stock," MPRA Paper 88667, University Library of Munich, Germany.
    18. Jordan Rappaport, 2014. "Monocentric city redux," Research Working Paper RWP 14-9, Federal Reserve Bank of Kansas City.
    19. Aaron Hedlund, 2018. "Credit Constraints, House Prices, and the Impact of Life Cycle Dynamics," Working Papers 1807, Department of Economics, University of Missouri.
    20. Leo Kaas & Georgi Kocharkov & Edgar Preugschat & Nawid Siassi, 2017. "Low Homeownership in Germany - A Quantitative Exploration," CESifo Working Paper Series 6775, CESifo.

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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