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House Price Gains and U.S. Household Spending from 2002 to 2006

Author

Listed:
  • Atif R. Mian

    (Princeton University)

  • Amir Sufi

    (University of Chicago)

Abstract

We examine the effect of rising U.S. house prices on borrowing and spending from 2002 to 2006. There is strong heterogeneity in the marginal propensity to borrow and spend. Households in low income zip codes aggressively liquefy home equity when house prices rise, and they increase spending substantially. In contrast, for the same rise in house prices, households living in high income zip codes are unresponsive, both in their borrowing and spending behavior. The entire effect of housing wealth on spending is through borrowing, and, under certain assumptions, this spending represents 0.8% of GDP in 2004 and 1.3% of GDP in 2005 and 2006. Households that borrow and spend out of housing gains between 2002 and 2006 experience significantly lower income and spending growth after 2006.

Suggested Citation

  • Atif R. Mian & Amir Sufi, 2014. "House Price Gains and U.S. Household Spending from 2002 to 2006," Working Papers 2014-2, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2014-2
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    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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