IDEAS home Printed from https://ideas.repec.org/p/red/sed017/1234.html
   My bibliography  Save this paper

The Long View of Housing Wealth Effects

Author

Listed:
  • Jon Steinsson

    (Columbia University)

  • Emi Nakamura

    (Columbia University)

  • Alisdair McKay

    (Boston University)

  • Adam Guren

    (Boston University)

Abstract

The response of consumption to house prices, sometimes called a “housing wealth effect,” has become a central object in the narrative of the great recession. Recent research has generally come to the conclusion that the wealth effect in the Great Recession was large: between four and ten cents per dollar of increased housing wealth was consumed within a year on average, and this figure is even higher for high LTV and low credit score borrowers who are more likely to be constrained (Mian, Sufi, and Rao, 2013; Case et al., 2013;, Caroll et al., 2011; Campbell and Cocco, 2007; Attanasio et al., 2009; Berger et al., 2016). One popular narrative is that financial innovation and an expansions of mortgage credit in the early 2000s allowed households to to use their houses as “ATMs,” leading to a much more powerful housing wealth effect than in the 20th Century. This paper evaluates whether a substantial housing wealth effect is a new phenomenon using 40 years of data going back to 1975. We propose a new instrument to evaluate these effects. We show that the large housing wealth effect experienced in the 2000s is not a new phenomenon. Indeed, the housing wealth effect has been large since at least the 1980s. We find our approach yields precise estimates of the elasticity of consumption and employment to house prices over time that are similar to estimates using the Saiz instrument in the 2000s, but that it has distinct advantages, particularly in the earlier period. We use our approach with rolling 5- and 10-year estimation windows to show that the housing wealth effect was low in the 2000s relative to its historic average. Furthermore, we find some speculative evidence of a nonlinearity: the housing wealth effect is stronger in busts. We develop a partial equilibrium heterogenous agents model with long-term mortgage debt and in which housing serves as collateral to evaluate these findings. Our new facts help discipline the model mechanisms that account for the housing wealth effect. In particular, these results cast doubt on the view that financial innovations in the 2000's led to a large increase in the housing wealth effect. Indeed, our model shows why the credit expansion in the 2000s may have reduced the strength of the housing wealth effect. We use our model together with our estimates of the consumption response to housing wealth to infer changes in credit supply throughout the 2000s boom and bust.

Suggested Citation

  • Jon Steinsson & Emi Nakamura & Alisdair McKay & Adam Guren, 2017. "The Long View of Housing Wealth Effects," 2017 Meeting Papers 1234, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1234
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed017:1234. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.