Did Easy Credit Lead to Overspending? Home Equity Borrowing and Household Behavior in the Early 2000s

47 Pages Posted: 9 Dec 2009 Last revised: 4 Mar 2010

See all articles by Daniel Cooper

Daniel Cooper

Federal Reserve Bank of Boston

Date Written: March 1, 2010

Abstract

Using data from the Panel Study of Income Dynamics, this paper examines how households' home equity extraction during the previous decade affected their spending and saving behavior.The study makes use of recently released 2009 housing and wealth data as well as the extensive data on household expenditures and balance sheets that are available starting in 1999. The results show that during the height of the house-price boom (the 2003-2005 period) a one-dollar increase in equity extraction led to 14 cents higher household expenditures.

Households also spent 21 cents of their extracted equity on home improvements and additions and saved roughly 19 cents of each dollar extracted through balance-sheet reshuffling. The spending, saving, and residential investment patterns are similar during the 2001-to-2003 and 2005-to-2007 periods. There is less evidence of households' extracting equity to fund expenditures prior to 2001, except for health care and transportation-related expenses. Overall, the results are consistent with households' extracting equity to fund necessary expenditures and desired investments.

JEL Classification: E21

Suggested Citation

Cooper, Daniel H., Did Easy Credit Lead to Overspending? Home Equity Borrowing and Household Behavior in the Early 2000s (March 1, 2010). FRB of Boston Public Policy Discussion Paper No. 09-7, Available at SSRN: https://ssrn.com/abstract=1520563 or http://dx.doi.org/10.2139/ssrn.1520563

Daniel H. Cooper (Contact Author)

Federal Reserve Bank of Boston ( email )

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