The (Mythical?) Housing Wealth Effect

31 Pages Posted: 16 Jun 2009 Last revised: 11 Sep 2022

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Stanley D. Longhofer

Wichita State University - W. Frank Barton School of Business

William Miles

Wichita State University - Department of Economics

Date Written: June 2009

Abstract

Models used to guide policy, as well as some empirical studies, suggest that the effect of housing wealth on consumption is large and greater than the wealth effect on consumption from stock holdings. Recent theoretical work, in contrast, argues that changes in housing wealth are offset by changes in housing consumption, meaning that unexpected shocks in housing wealth should have little effect on non-housing consumption. We reexamine the impact of housing wealth on non-housing consumption, employing the Case-Quigley-Shiller data on U.S. housing wealth that have been used in prior studies to estimate a large housing wealth effect. Existing empirical work fails to control for the fact that changes in housing wealth may be correlated with changes in expected permanent income, biasing the resulting estimates. Once we control for the endogeneity bias resulting from the correlation between housing wealth and permanent income, we find that housing wealth has a small and insignificant effect on consumption. Additional analysis of time-series results provides further support for that view.

Suggested Citation

Calomiris, Charles W. and Longhofer, Stanley D. and Miles, William, The (Mythical?) Housing Wealth Effect (June 2009). NBER Working Paper No. w15075, Available at SSRN: https://ssrn.com/abstract=1418933

Charles W. Calomiris (Contact Author)

Columbia University - Columbia Business School ( email )

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601 Uris, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-8748 (Phone)
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Stanley D. Longhofer

Wichita State University - W. Frank Barton School of Business ( email )

1845 N. Fairmount
Wichita, KS 67260
United States
316-978-7120 (Phone)
316-978-3263 (Fax)

HOME PAGE: http://webs.wichita.edu/longhofer

William Miles

Wichita State University - Department of Economics ( email )

Wichita, KS 67260-0078
United States

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