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


Atif R. Mian


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

Amir Sufi


University of Chicago - Booth School of Business; NBER

May 21, 2010

Chicago Booth Research Paper No. 09-20

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.

Number of Pages in PDF File: 36

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

JEL Classification: D12, E21, E23, R21

working papers series


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Date posted: May 1, 2009 ; Last revised: May 21, 2010

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: http://ssrn.com/abstract=1397607 or http://dx.doi.org/10.2139/ssrn.1397607

Contact Information

Atif R. Mian
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
Princeton University - Woodrow Wilson 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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