New Evidence on Housing Wealth and Consumption Channels
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.
KeywordsConsumption Housing wealth Home-equity credit Liquidity constraint
JEL ClassificationE21 R22 G21
The authors thank Lutz Arnold, Michael LaCour-Little, Gabriel Lee, Andreas Lehnert, Alvaro Mezza, Stanimira Milcheva, Daniel Ringo, Rolf Tschernig, and participants in the Lunch Seminar at the University of Regensburg, the University of Reading, the 7th ReCapNet Conference, the European Real Estate Society Annual Meeting, and the American Real Estate and Urban Economics National Meeting for useful suggestions on previous versions of the paper. Downs acknowledges The Kornblau Institute for support. The authors alone are responsible for any errors.
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