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Your House or Your Credit Card, Which Would You Choose? Personal Delinquency Tradeoffs and Precautionary Liquidity Motives

43 Pages Posted: 3 Jun 2010  

Ethan Cohen-Cole

Econ One Research

Jonathan Morse

Federal Reserve Banks - Federal Reserve Bank of Boston

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2010

Abstract

This paper presents evidence that precautionary liquidity concerns lead many individuals to pay credit card bills even at the cost of mortgage delinquencies and foreclosures. While the popular press and some recent literature have suggested that this choice may emerge from steep declines in housing prices, we find evidence that individual-level liquidity concerns are more important in this decision. That is, choosing credit cards over housing suggests a precautionary liquidity preference.

By linking the mortgage delinquency decisions to individual-level credit conditions, we are able to assess the compound impact of reductions in housing prices and retrenchment in the credit markets. Indeed, we find the availability of cash-equivalent credit to be a key component of the delinquency decision. We find that a one standard deviation reduction in available credit elicits a change in the predicted probability of mortgage delinquency that is similar in both direction and nearly double in magnitude to a one standard deviation reduction in housing price changes (the values are -25% and -13% respectively). Our findings are consistent with consumer finance literature that finds individuals have a preference for preserving liquidity - even at significant cost.

Keywords: consumer finance, delinquency, payment priority

JEL Classification: D14, G20

Suggested Citation

Cohen-Cole, Ethan and Morse, Jonathan, Your House or Your Credit Card, Which Would You Choose? Personal Delinquency Tradeoffs and Precautionary Liquidity Motives (May 1, 2010). Available at SSRN: https://ssrn.com/abstract=1619929 or http://dx.doi.org/10.2139/ssrn.1619929

Ethan Cohen-Cole (Contact Author)

Econ One Research ( email )

United States

Jonathan Morse

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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