House Price Fluctuations: The Role of Housing Wealth as Borrowing Collateral

Abstract

Rising house prices affect household spending by either loosening a household's lifetime budget constraint (pure wealth effect) or the household's borrowing constraint so that consumption rises toward the level implied by the consumption Euler equation (borrowing collateral effect). The empirical findings in this paper are consistent with house price appreciation affecting household spending through the borrowing collateral channel and not the pure wealth effect channel. The consumption of potentially borrowing constrained households increases between [dollar]0.06 and [dollar]0.18 per dollar increase in their housing equity, while the consumption of unconstrained households is little changed.

House prices, wealth effects and labor supply

“…However, house price gains loosen borrowing constraints and this may impact on labor supply decisions. Cooper (2013) shows that among US households, the main route by which house price gains influence consumption is through loosening borrowing constraints.…”

“…We find most households do not adjust their labor supply when house prices change, but for subsets of households there are large effects. The household types that show significant responses to housing wealth changes are those at the margins of labor supply: married women, at the margin of household labor supply; and men close to retirement at the inter-temporal margin 1 Recent studies on the impact of house prices upon household consumption and saving include Campbell and Cocco (2007), Disney, Gathergood and Henley (2010), Attanasio, Leicester and Wakefield (2011), Carroll, Otsuka and Slacalek (2011), Browning, Gørtz, and Leth-Petersen (2013, Mian, Rao and Sufi (2013), Cooper (2013); on indebtedness see Hurst and Stafford (2004), Disney and Gathergood (2011) and Mian and Sufi (2011). of lifetime labor supply. The prior literature shows these households are responsive to changes in marginal tax rates.…”

The Impact of Housing Prices on Health in U.S. Before, During and After the Great Recession

“…Here the interpretation would simply be the effects of a reduction in housing prices on risky behaviors and health outcomes, assuming a symmetric effect of increases and reductions in housing prices. 10 Using data from the PSID from 1968 to , Cooper (2013 finds that U.S. household spending is influenced by changes in housing prices through the borrowing collateral mechanism but not the loosening budget constraints mechanism.…”

Wealth, Pensions, Debt, and Savings: Considerations for a Panel Survey

“…For example, some longstanding and more recent questions include: In principle, researchers should be able to address many of the most pressing questions about household wealth accumulation with these existing data sets. And in fact, the PSID wealth data have been used by Hurst, Luoh, and Stafford (1998) to explore wealth dynamics in the 1980s and 1990s; by Charles and Hurst (2003) to explore the correlation of wealth across generations; by Cooper (2013) to study the relationship between housing wealth and consumption; and by Dynan (2012) to consider the role that debt overhang plays in consumption. Numerous studies have used the HRS data to explore wealth changes before and after retirement- Love, Palumbo, and Smith (2009) and Poterba, Venti, and Wise (2011) are two such examples-as well as other aspects of wealth accumulation, such as family investments in college education (Brown, Scholz, and Seshadri, 2012).…”