Working Paper: NBER ID: w15283
Authors: Atif R. Mian; Amir Sufi
Abstract: Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 to 30 cents for every dollar increase in home equity. Money extracted from increased home equity is not used to purchase new real estate or pay down high credit card balances, which suggests that borrowed funds may be used for real outlays (i.e., consumption or home improvement). Home equity-based borrowing is stronger for younger households, households with low credit scores, and households with high initial credit card utilization rates. Homeowners in high house price appreciation areas experience a relative decline in default rates from 2002 to 2006 as they borrow heavily against their home equity, but experience very high default rates from 2006 to 2008. Our estimates suggest that home equity-based borrowing is equal to 2.8% of GDP every year from 2002 to 2006, and accounts for at least 34% of new defaults from 2006 to 2008.
Keywords: No keywords provided
JEL Codes: E00; E2; E3; E5; G01; G21; G3; G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| homeowner borrowing (G51) | defaults (Y60) |
| house price growth (R31) | defaults (Y60) |
| high house price appreciation (R31) | decline in default rates (G33) |
| decline in default rates (G33) | reversal post-2006 (P27) |
| home equity-based borrowing (G51) | consumption or home improvements (E21) |
| house price growth (R31) | homeowner borrowing (G51) |