House Prices and Consumption
I study the consumption responses of heterogeneous households following changes in both house prices and interest rates. I show the common assumption that household period utility is separable in housing and consumption can be consistent with the observed co-movement between these two series only in the absence of housing transaction costs. When these costs are introduced into dynamic stochastic general equilibrium (DSGE) models characterized by separable preferences, consumption no longer increases after a rise in house prices. As it is well known, transaction costs are an important ingredient in house sales. I address this issue by developing a model that allows for non-separable preferences in housing and consumption alongside housing transaction costs. The results of my model closely match the aggregate data. Furthermore, it predicts that credit-constrained households will be substantially more responsive to changes in both house prices and interest rates than unconstrained households. Following a rise in house prices, consumption among constrained households increases by far more than the consumption of unconstrained households. Following a rise in interest rates, constrained households' consumption falls by more than that of unconstrained households. I trace this differing responsiveness in consumption to the house loan-to-value ratio of credit-constrained households. Higher loan-to-value ratios imply larger differences in their elasticity of response relative to unconstrained households. I also find that these differences widen with the degree of complementarity between housing and consumption. These predictions of my model are confirmed by household data from the Consumer Expenditure Surveys.
|Date of creation:||28 Nov 2010|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
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- Monika Piazzesi & Martin Schneider & Selale Tuzel, 2006.
"Housing, Consumption, and Asset Pricing,"
NBER Working Papers
12036, National Bureau of Economic Research, Inc.
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- Li, Wenli & Liu, Haiyong & Yao, Rui, 2009.
"Housing over time and over the life cycle: a structural estimation,"
09-7, Federal Reserve Bank of Philadelphia.
- Li, Wenli & Liu, Haiyong & Yang, Fang & Yao, Rui, 2015. "Housing over time and over the life cycle: a structural estimation," Working Papers 15-4, Federal Reserve Bank of Philadelphia.
- Matteo Iacoviello, 2005.
"House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle,"
American Economic Review,
American Economic Association, vol. 95(3), pages 739-764, June.
- Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
- Marjorie Flavin & Takashi Yamashita, 2002. "Owner-Occupied Housing and the Composition of the Household Portfolio," American Economic Review, American Economic Association, vol. 92(1), pages 345-362, March.
- Ryo Kato, 2002. "Matlab code for a standard RBC model," QM&RBC Codes 108, Quantitative Macroeconomics & Real Business Cycles.
- Rui Yao & Haiyong Liu & Wenli Li, 2008. "Housing Over the Life Cycle: A Structural Estimation," 2008 Meeting Papers 701, Society for Economic Dynamics.
- Janice C. Eberly, "undated".
"Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases,"
Rodney L. White Center for Financial Research Working Papers
22-91, Wharton School Rodney L. White Center for Financial Research.
- Eberly, Janice C, 1994. "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 403-436, June.
- Eberly, J.C., 1990. "Adjustment of Consumers'durables Stocks: Evidence from Automobile Purchases," Weiss Center Working Papers 22-91, Wharton School - Weiss Center for International Financial Research.
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