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The Journal of Real Estate Finance and Economics

Erschienen in:

03.11.2017

New Evidence on Housing Wealth and Consumption Channels

verfasst von: Bing Zhu, Lingxiao Li, David H. Downs, Steffen Sebastian

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 1/2019

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Abstract

This paper provides new evidence on the effect of housing wealth on consumption by focusing on the impact of home-equity extraction. We develop a household consumption decision model to illustrate the differential effect of home-equity extraction, relative to net home equity, on consumption. The home-equity extraction channel is also shown to vary with household-level borrowing constraints. Based on U.S. household survey data and an instrumental-variables approach, our empirical results validate model predictions. We find that the marginal propensity to consume is two times higher for the home-equity extraction channel relative to the conventional housing wealth effect. The consumption effect of home-equity extraction is more than 2.5 times greater for liquidity-constrained households than for unconstrained households. These results are even more pronounced in the case of durable goods consumption for constrained borrowers.

Vorheriger Artikel Information Entropy-Based Housing Spatiotemporal Dependence

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For example, see Belsky and Prakken (2004); Kishor (2007); Case et al. (2008); Benjamin and Chinloy (2008); Bostic et al. (2009); Tsai et al. (2012); Abdallah and Lastrapes (2013); Guo and Hardin (2014); and others.

For example, see Kishor (2007); Simo-Kengne et al. (2015); and Bostic et al. (2009).

For example, see Muellbauer and Murphy (1990); Iacoviello (2004); Aoki et al. (2004); Leth-Petersen (2010); Browning et al. (2013).

We only consider homeowners, as home-equity credit is only available to homeowner. Thus, we do not include house-purchasing decisions for the households in this paper, and assume that the housing stock remains constant before the household sells the property at the final stage.

When D₁ stands for a refinancing loan, the payoff diagram is slightly different from the home-equity loan. In this case, D₀ is replaced by D₁ in the beginning of period 1, at a refinancing mortgage rate of r_d1. r_d1 is normally lower than the mortgage rate for the original loan; however, origination fees, prepayment penalties, or closing costs can trigger additional costs. By the end of period 1 there is no longer any D₀; instead, the household pays the interest expense and principal related to D₁. Such a change in the payment arrangement does not qualitatively change the results; the estimated partial derivative of C₁ with respect to D₁ is similar. A detailed derivation is available from the authors upon request. I think the above change helps to clarify this issue.

Other payment strategies do not qualitatively change the conclusion.

We do not consider default in this study, and assume that households are able to repay all debts.

Origination fees, prepayment penalties, and closing costs can affect the amount of cash extracted by refinancing loans. However, as these data are not available in PSID or HMDA, extracted home equity in our empirical estimation is measured as the increase in the mortgage balance for non-movers and decrease in net home equity for movers. We acknowledge that these additional costs can systematically overestimate the cash available for extraction. The result could be a downward bias, such that the actual consumption effect of extracted home equity may be even larger than our estimation.

Wooldrige (2002) introduces a two-stage IV estimator that is suitable for IV estimation with a nonlinear regression in the first stage, as is the case with our model. Standard errors of the regression coefficients are corrected according to Wooldrige (2002).

Empirical results are based on the instrumented extracted home equity. For expositional simplicity, we will use “extracted home equity” going forward.

The two-year lag may lead to underestimation of the consumption effect of home-equity extraction. With the two-year lag, extracted home equity is defined as the increase in mortgage indebtedness since the first mortgage over the last 2 years for non-movers, or the decrease in home equity over the last 2 years for movers. However, household consumption is only for the past year. If, over the 2-years period, a household extracts home equity in the first year and also consumes the converted cash in the first year, the extracted home equity is counted but the consumption is not observed. In other words, the 2-years lag means that any impact of extracted home equity on consumption would be stronger if part of the extracted home equity is consumed in the first year.

As our paper focuses on the collateral effect, the IV approach is applied to extracted home equity. As home value may also be endogenous to consumption, the impact of home equity on consumption could be overestimated.

For example, the MPC for home equity is calculated as the respective coefficient multiplied by the ratio of average consumption to average home equity, and the MPC for extracted home equity is calculated as the respective coefficient multiplied by the ratio of average consumption to average extracted home equity.

Results based on the other specifications are available from the authors upon request.

In the PSID database, household payments to credit cards or student loans are not available. Our debt payment, therefore, only includes mortgage and car payments. We acknowledge that this debt-payment measure may underestimate the actual payment by households.

We gratefully acknowledge an anonymous reviewer for suggesting this approach.

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Belsky, E., Prakken, J. (2004). Housing wealth effects: housing’s impact on wealth accumulation, wealth distribution and consumer spending. Joint Centre on housing studies working paper, Harvard University, W04–13.

Benjamin, J. D., & Chinloy, P. (2008). Home equity, household savings and consumption. Journal of Real Estate Finance and Economics, 37, 21–32.CrossRef

Bostic, R., Gabriel, S., & Painter, G. (2009). Housing wealth, financial wealth, and consumption: new evidence from micro data. Regional Science and Urban Economics, 39, 79–89.CrossRef

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Titel: New Evidence on Housing Wealth and Consumption Channels
verfasst von: Bing Zhu
Lingxiao Li
David H. Downs
Steffen Sebastian
Publikationsdatum: 03.11.2017
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 1/2019
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-017-9638-8

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