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Consumption and Savings of First Time House Owners: How Do They Deal with Adverse Income Shocks?

Author

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  • João Ejarque

    (University of Essex)

  • Søren Leth-Petersen

    (Department of Economics, University of Copenhagen)

Abstract

We characterize savings behavior around the point of the first house purchase. Using a panel data set with income and wealth information on Danish first-time house owners we document that households save for the down payment, mortgage to the limit, run down liquid assets at purchase, and adjust to adverse income shocks occurring just after the purchase by reducing consumption. We build a model that replicates these observations, show that the preference parameters are identified from the data, and estimate them. Based on the estimated model house buying significantly reduces the ability to smooth adverse income shocks.

Suggested Citation

  • João Ejarque & Søren Leth-Petersen, 2008. "Consumption and Savings of First Time House Owners: How Do They Deal with Adverse Income Shocks?," CAM Working Papers 2008-08, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  • Handle: RePEc:kud:kuieca:2008_08
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    File URL: http://www.econ.ku.dk/cam/wp0910/wp0708/2008-08.pdf/
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    References listed on IDEAS

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    1. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
    2. Ortalo-Magne, Francois & Rady, Sven, 2002. "Tenure choice and the riskiness of non-housing consumption," Journal of Housing Economics, Elsevier, vol. 11(3), pages 266-279, September.
    3. James Banks & Richard Blundell & Zoë Oldfield & James P. Smith, 2016. "House Price Volatility and the Housing Ladder," NBER Chapters,in: Insights in the Economics of Aging, pages 87-119 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Davis, Morris A. & Van Nieuwerburgh, Stijn, 2015. "Housing, Finance, and the Macroeconomy," Handbook of Regional and Urban Economics, Elsevier.

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