Working Paper: CEPR ID: DP7894
Authors: Maria Jose Luengo Prado; Bent E. Sorensen; Dmytro Hryshko
Abstract: Using data from the Panel Study of Income Dynamics, we show that homeowners are able to maintain a high level of consumption following job loss (or disability) in periods of rising local house prices while the consumption drop for homeowners who lose their job in times of lower house prices is substantial. The results are consistent with homeowners being able to access wealth gains when housing appreciates as witnessed by their ability to smooth consumption more than renters. We calibrate and simulate a model of endogenous homeownership and consumption which is able to reproduce the patterns in the data quite well.
Keywords: Consumption Smoothing; PSID; Regional House Prices
JEL Codes: D12; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| house price changes (R31) | consumption outcomes (E21) |
| rising local house prices (R31) | nondurable consumption following job loss (D12) |
| constant house prices (R31) | consumption drop of about 5% (E20) |
| house prices increase by approximately 26% (R31) | consumption drop mitigated to nearly zero (E21) |
| interaction of house prices with displacement and disability (R28) | dampening negative impact on consumption (D12) |
| house prices (R31) | consumption drop for renters (R21) |