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The (Mythical?) Housing Wealth Effect

  • Charles Calomiris
  • Stanley D. Longhofer
  • William Miles

Models used to guide policy, as well as some empirical studies, suggest that the effect of housing wealth on consumption is large and greater than the wealth effect on consumption from stock holdings. Recent theoretical work, in contrast, argues that changes in housing wealth are offset by changes in housing consumption, meaning that unexpected shocks in housing wealth should have little effect on non-housing consumption. We reexamine the impact of housing wealth on non-housing consumption, employing the Case-Quigley-Shiller data on U.S. housing wealth that have been used in prior studies to estimate a large housing wealth effect. Existing empirical work fails to control for the fact that changes in housing wealth may be correlated with changes in expected permanent income, biasing the resulting estimates. Once we control for the endogeneity bias resulting from the correlation between housing wealth and permanent income, we find that housing wealth has a small and insignificant effect on consumption. Additional analysis of time-series results provides further support for that view.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15075.

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Date of creation: Jun 2009
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Handle: RePEc:nbr:nberwo:15075
Note: EFG
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  1. Orazio P. Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2009. "Booms and Busts: Consumption, House Prices and Expectations," Economica, London School of Economics and Political Science, vol. 76(301), pages 20-50, 02.
  2. Muellbauer, John, 2008. "Housing, Credit and Consumer Expenditure," CEPR Discussion Papers 6782, C.E.P.R. Discussion Papers.
  3. Levin, Laurence, 1998. "Are assets fungible?: Testing the behavioral theory of life-cycle savings," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 59-83, July.
  4. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
  5. Sydney Ludvigson & Charles Steindel, 1998. "How important is the stock market effect on consumption?," Research Paper 9821, Federal Reserve Bank of New York.
  6. Campbell, John & Cocco, Joao, 2007. "How Do House Prices Affect Consumption? Evidence from Micro Data," Scholarly Articles 3122600, Harvard University Department of Economics.
  7. Richard K. Green, 1997. "Follow the Leader: How Changes in Residential and Non-residential Investment Predict Changes in GDP," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(2), pages 253-270.
  8. Karl E. Case & Robert J. Shiller & John M. Quigley, 2001. "Comparing Wealth Effects: The Stock Market Versus the Housing Market," NBER Working Papers 8606, National Bureau of Economic Research, Inc.
  9. Frederic S. Mishkin, 2007. "Housing and the monetary transmission mechanism," Finance and Economics Discussion Series 2007-40, Board of Governors of the Federal Reserve System (U.S.).
  10. Buiter, Willem H., 2009. "Housing wealth isn't wealth," Economics Discussion Papers 2009-56, Kiel Institute for the World Economy.
  11. Gauger, Jean & Snyder, Tricia Coxwell, 2003. "Residential Fixed Investment and the Macroeconomy: Has Deregulation Altered Key Relationships?," The Journal of Real Estate Finance and Economics, Springer, vol. 27(3), pages 335-54, November.
  12. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," Economics Working Paper Archive 535, The Johns Hopkins University,Department of Economics.
  13. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  14. Alan J. Auerbach & Kevin Hassett, 1989. "Corporate Savings and Shareholder Consumption," NBER Working Papers 2994, National Bureau of Economic Research, Inc.
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