Housing over time and over the life cycle: a structural estimation

Supersedes Working Paper 09-7. We estimate a structural model of optimal life-cycle housing and nonhousing consumption in the presence of labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consumption and explicitly incorporates a housing adjustment cost. Our estimation fits the cross-sectional and time-series household wealth and housing profies from the Panel Study of Income Dynamics (1984 to 2005) reasonably well and suggests an intratemporal elasticity of substitution between housing and nonhousing consumption of 0.487. The low elasticity estimate is largely driven by moments conditional on state house prices and moments in the latter half of the sample period and is robust to different assumptions of housing adjustment cost. We then conduct policy analyses in which we let house price and income take values as those observed between 2006 and 2011. We show that the responses depend importantly on the housing adjustment cost and the elasticity of sub-stitution between housing and nonhousing consumption. In particular, compared with the benchmark, the impact of the shocks on homeownership rates is reduced, but the impact on nonhousing consumption is magnified when the house selling cost is sizable or when housing service and nonhousing consumption are highly substitutable.