House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis

36 Pages Posted: 1 May 2009 Last revised: 21 May 2010

See all articles by Atif R. Mian

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Princeton School of Public and International Affairs; NBER

Amir Sufi

University of Chicago - Booth School of Business; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: May 21, 2010

Abstract

Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 cents for every dollar increase in home equity. Home equity-based borrowing is stronger for younger households, households with low credit scores, and households with high initial credit card utilization rates. Money extracted from increased home equity is not used to purchase new real estate or pay down high credit card balances, which suggests that borrowed funds may be used for real outlays. Lower credit quality households living in high house price appreciation areas experience a relative decline in default rates from 2002 to 2006 as they borrow heavily against their home equity, but experience very high default rates from 2006 to 2008. Our conservative estimates suggest that home equity-based borrowing added $1.25 trillion in household debt, and accounts for at least 39% of new defaults from 2006 to 2008.

Keywords: subprime, mortgage, home equity, household leverage, house prices, consumption, wealth effect

JEL Classification: D12, E21, E23, R21

Suggested Citation

Mian, Atif R. and Sufi, Amir, House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis (May 21, 2010). Chicago Booth Research Paper No. 09-20, Available at SSRN: https://ssrn.com/abstract=1397607 or http://dx.doi.org/10.2139/ssrn.1397607

Atif R. Mian

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Princeton School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Sufi (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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