Housing over Time and over the Life Cycle: A Structural Estimation

53 Pages Posted: 14 May 2009 Last revised: 23 May 2015

See all articles by Wenli Li

Wenli Li

Federal Reserve Bank of Philadelphia

Haiyong Liu

East Carolina University - Department of Economics

Rui Yao

Baruch College - Department of Economics and Finance

Multiple version iconThere are 4 versions of this paper

Date Written: March 1, 2009

Abstract

The authors estimate a structural model of optimal life-cycle housing and consumption in the presence of realistic labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consumption, and explicitly incorporates a house adjustment cost. Their estimation fits the cross-sectional and time-series household wealth and housing profiles from the Panel Study of Income Dynamics quite well and suggests an intra-temporal elasticity of substitution between housing and nonhousing consumption of 0.33 and a housing adjustment cost that amounts to about 15 percent of house value. Policy experiments with estimated preference parameters imply that households respond nonlinearly to house price changes with large house price declines leading to sizable decreases in both the aggregate homeownership rate and aggregate nonhousing consumption. The average marginal propensity to consume out of housing wealth changes ranges from 0.4 percent to 6 percent. When lending conditions are tightened in the form of a higher down payment requirement, interestingly, large house price declines result in more severe drops in the aggregate homeownership rate but milder decreases in nonhousing consumption.

Keywords: Life-cycle, housing adjustment costs, intratemporal substitution, methods of simulated moments

JEL Classification: E21, R21

Suggested Citation

Li, Wenli and Liu, Haiyong and Yao, Rui, Housing over Time and over the Life Cycle: A Structural Estimation (March 1, 2009). FRB of Philadelphia Working Paper No. 09-7. Available at SSRN: https://ssrn.com/abstract=1404607 or http://dx.doi.org/10.2139/ssrn.1404607

Wenli Li (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Haiyong Liu

East Carolina University - Department of Economics ( email )

Brewster Building
Greenville, NC 27858
United States

Rui Yao

Baruch College - Department of Economics and Finance ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3494 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://zicklin.baruch.cuny.edu/faculty/profiles/yao.html

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