House Price Gains and U.S. Household Spending from 2002 to 2006
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.
This research was supported by funding from the Initiative on Global Markets at Chicago Booth, the Fama-Miller Center at Chicago Booth, and the Global Markets Institute at Goldman Sachs. Any opinions, findings, or conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the view of Goldman Sachs, the Global Markets Institute, or the National Bureau of Economic Research. We are very grateful to Doug McManus and his team at Freddie Mac for providing us with data. We thank Chris Carroll, Edward Glaeser, Erik Hurst, Greg Kaplan, Sydney Ludvigson, Jonathan Parker, Luigi Pistaferri, Kenneth Rogoff, and seminar participants at Harvard, Northwestern, Chicago Booth, the Fed Board, the Chicago Fed, Goldman Sachs, and Princeton for helpful comments.
- Homeowners borrowed $0.19 per $1 of home equity gains from 2002 to 2006. In House Price Gains and U.S. Household Spending from 2002...