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Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment

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  • Xiaoqing Zhou

    (Bank of Canada)

Abstract

The consumption boom-bust cycle in the 2000s coincided with large fluctuations in the volume of home equity borrowing. Contrary to conventional wisdom, I show that homeowners largely borrowed for residential investment and not consumption. I rationalize this empirical finding using a calibrated two-goods, multiple-assets, heterogeneous-agent life-cycle model with borrowing frictions. The model replicates key features of the household-level and aggregate data. The model offers an alternative explanation of the consumption boom-bust cycle. This cycle is caused by large fluctuations in the number of borrowers and hence in total home equity borrowing, even though the fraction of borrowed funds spent on consumption is small.

Suggested Citation

  • Xiaoqing Zhou, 2018. "Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment," 2018 Meeting Papers 795, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:795
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    References listed on IDEAS

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    1. Joseph Vavra & Erik Hurst & Andreas Fuster & Martin Beraja, 2017. "Regional Heterogeneity and Monetary Policy," 2017 Meeting Papers 270, Society for Economic Dynamics.
    2. Fang Yang, 2009. "Consumption over the Life Cycle: How Different is Housing?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 423-443, July.
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    4. Neil Bhutta & Benjamin J. Keys, 2016. "Interest Rates and Equity Extraction during the Housing Boom," American Economic Review, American Economic Association, vol. 106(7), pages 1742-1774, July.
    5. Davis, Morris A. & Heathcote, Jonathan, 2007. "The price and quantity of residential land in the United States," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2595-2620, November.
    6. Arlene Wong, 2016. "Population aging and the transmission of monetary policy to consumption," 2016 Meeting Papers 716, Society for Economic Dynamics.
    7. Marco Di Maggio & Amir Kermani & Christopher Palmer, 2016. "How Quantitative Easing Works: Evidence on the Refinancing Channel," NBER Working Papers 22638, National Bureau of Economic Research, Inc.
    8. Aditya Aladangady, 2014. "Homeowner Balance Sheets and Monetary Policy," Finance and Economics Discussion Series 2014-98, Board of Governors of the Federal Reserve System (U.S.).
    9. Daniel H. Cooper, 2009. "Did easy credit lead to economic peril?: home equity borrowing and household behavior in the early 2000s," Public Policy Discussion Paper 09-7, Federal Reserve Bank of Boston.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment
      by Christian Zimmermann in NEP-DGE blog on 2018-02-27 03:26:39

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    Cited by:

    1. Carlos Garriga & Aaron Hedlund, 2019. "Crises in the Housing Market: Causes, Consequences, and Policy Lessons," Working Papers 2019-33, Federal Reserve Bank of St. Louis.
    2. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian & William L. Skimmyhorn, 2019. "Borrowing to Save? The Impact of Automatic Enrollment on Debt," NBER Working Papers 25876, National Bureau of Economic Research, Inc.
    3. Xiaoqing Zhou, 2020. "A Quantitative Evaluation of the Housing Provident Fund Program in China," Working Papers 2008, Federal Reserve Bank of Dallas.

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    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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