Essays on Housing Wealth and Consumer Behavior.

Abstract

This dissertation considers how housing wealth impacts household behavior. The essays pay close attention to the borrowing collateral role of housing wealth, and address how changing house prices affect household spending. Chapter II of the dissertation investigates the relationship between house values and consumption. The chapter demonstrates that house values impact consumption by serving as borrowing collateral for households to finance and smooth their consumption. Changing house values have little effect, however, on the expenditures of households without apparent borrowing needs. In addition, the chapter shows that the impact of falling house prices on aggregate consumption is relatively small. Chapter III examines how households’ home equity extraction during 2001 to 2003 and 2003 to 2005 affects their spending and saving behavior. The chapter finds that a 1 dollar increase in equity extraction leads to 95 or 98 cent higher consumption expenditures. Nearly all of this spending increase is reversed in the subsequent period. Households who extract extract equity are somewhat more likely to pay down their higher cost credit card debt as well as invest in other real estate and businesses. Overall, the results in the chapter are consistent with households extracting equity to fund one-time durable good type consumption needs. The final chapter of this dissertation considers the theoretical relationship between collateralized borrowing and household consumption. The chapter examines households’ consumption decisions when they can borrow against their equity in an illiquid asset (house) to finance their consumption. This theoretical approach addresses questions that are not easily answered empirically such as whether household spending responds symmetrically to positive versus negative house price shocks. The paper finds that collateralized borrowing capacity acts as a partial hedge against future labor income risk. Indeed, households borrow to smooth their consumption somewhat in response to negative labor income shocks. In addition, the consumption growth responses to illiquid asset price shocks are relatively symmetric. Also, the impact of house price shocks on consumption is not large compared to income shocks.