Working Paper: NBER ID: w20152
Abstract: We examine the effect of rising U.S. house prices on borrowing and spending from 2002 to 2006. There is strong heterogeneity in the marginal propensity to borrow and spend. Households in low income zip codes aggressively liquefy home equity when house prices rise, and they increase spending substantially. In contrast, for the same rise in house prices, households living in high income zip codes are unresponsive, both in their borrowing and spending behavior. The entire effect of housing wealth on spending is through borrowing, and, under certain assumptions, this spending represents 0.8% of GDP in 2004 and 1.3% of GDP in 2005 and 2006. Households that borrow and spend out of housing gains between 2002 and 2006 experience significantly lower income and spending growth after 2006.
Keywords: House Prices; Household Spending; Consumer Behavior; Financial Shocks
JEL Codes: E21; E32; E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Household borrowing (G51) | Household spending (D19) |
| Low cash-on-hand households (D19) | Marginal propensity to borrow (E62) |
| High-income zip codes (R23) | Marginal propensity to borrow (E62) |
| Low-income areas (I32) | Marginal propensity to spend on new autos (E20) |
| House price growth (R31) | Household borrowing (G51) |
| House price growth (R31) | Household spending (D19) |
| House price growth (R31) | Marginal propensity to borrow (E62) |
| House price growth (R31) | Marginal propensity to spend on new autos (E20) |