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Wealth, Composition, Housing, Income and Consumption

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Abstract

The present research covering the latest residential boom and bust cycle highlights the lack of uniform or constant time invariant wealth, housing and income relations. More important, wealth composition is shown to be a significant determinant of consumption. The marginal effects of housing equity, financial wealth and income differ substantially based on the composition of household wealth. Households with the highest percentage of net worth in financial assets have much lower income effects, have substantially higher marginal effects associated with stock holdings and have housing equity effects that differ noticeably from other households. Income effects for groups with the smallest amounts of relative financial wealth are dramatically higher than for households with greater financial wealth. Wealth and its composition affect consumption.

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Notes

  1. Existing research has pegged marginal consumption from a housing wealth effect at anywhere from 2 % to 15 % or more based on methodology and data studied (Benjamin et al. 2004a; Case et al. 2005; Campbell and Cocco 2007; Kishor 2007; Carroll et al. 2011; and others).

  2. Of note, many regulatory standards specifically exclude housing equity in determining the suitability of an investment. Also, the major wealth management firms exclude housing when determining investable wealth. While these firms earn fees from the management of financial assets, the distinction between the two types of wealth by financial professionals is prevalent and implies a difference in asset characteristics.

  3. Bostic et al. (2009), Benjamin et al. (2004b), and Benjamin and Chinloy (2008) and others confine their analysis to the pre-real estate boom period.

  4. A major issue that has impacted the assessment of these effects is limited data on consumption. Like in prior studies this limitation is acknowledged.

  5. Muellbauer (2007) makes a related argument that higher loan-to-value ratios increase consumption. Again, higher debt allows retention of cash for consumption.

  6. Bostic et al. (2009) following Goodman and Kawai (1982) use an abbreviated model that posits that consumption is a function of current income, asset values, debt and a vector of household characteristics.

  7. PSID is a nationally representative sample of U.S. households starting from 1968 with over 18,000 individuals living in 5000 families. It is of longitudinal nature in design, but cross-sectionally also representative. Since 1999, PSID has switched from annual surveys to biennial ones. Furthermore, prior to 1999, wealth information is only solicited once every five years.

  8. In our model and data, we have not considered the fractions in riskless savings deposits, thus observations are not exactly switched off in classification tiers based on the ratio of stock holdings versus that of housing equity.

  9. Direct comparisons of the 90 to 100 %, 80 to 90 %, 70 to 80 %, and 0 to 70 % stock holdings as a percentage of net worth household groups as well as comparisons of the households segmented based on ratio of home equity to net worth from 0 to 10 %, 10 to 20 %, 20 to 30 %, and 30 to 100 % provide complementary and confirmatory results as well. The households with the largest portion of net worth in financial assets (the 90 to 100 % group in the first measure and 0 to 10 % group in the second measure) have statistically significant and large coefficients indicative or a greater impact of stocks on consumption. For example, the coefficient of the stock holdings variable for the 0 to 10 % home equity to net worth group is 0.0436 (and significant at the 1 % level), while the coefficients for the other three groups in order are 0.0068, −0.0187, and 0.0020, respectively and are not statistically significant.

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Authors and Affiliations

  1. Department of Economics, College of Arts and Sciences, Florida International University, 11200 SW 8th Street, Miami, FL, 33199, USA

    Sheng Guo

  2. Jerome Bain Real Estate Institute, Hollo School of Real Estate, College of Business Administration, Florida International University, 11200 SW 8th Street, Miami, FL, 33199, USA

    William G. Hardin III

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  1. Sheng Guo
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Correspondence to William G. Hardin III.

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Guo, S., Hardin, W.G. Wealth, Composition, Housing, Income and Consumption. J Real Estate Finan Econ 48, 221–243 (2014). https://doi.org/10.1007/s11146-012-9390-z

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