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

40 Pages Posted: 24 Jan 2015

See all articles by Wenli Li

Wenli Li

Federal Reserve Bank of Philadelphia

Haiyong Liu

East Carolina University - Department of Economics

Fang Yang

Louisiana State University, Baton Rouge

Rui Yao

Baruch College - Department of Economics and Finance

Multiple version iconThere are 4 versions of this paper

Date Written: January 7, 2015

Abstract

We estimate a structural model of optimal life-cycle housing and nonhousing consumption in the presence of labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consumption and explicitly incorporates a housing adjustment cost. Our estimation fits the cross-sectional and time-series household wealth and housing profiles from the Panel Study of Income Dynamics (1984 to 2005) reasonably well and suggests an intratemporal elasticity of substitution between housing and nonhousing consumption of 0.487. The low elasticity estimate is largely driven by moments conditional on state house prices and moments in the latter half of the sample period and is robust to different assumptions of housing adjustment cost. We then conduct policy analyses in which we let house price and income take values as those observed between 2006 and 2011. We show that the responses depend importantly on the housing adjustment cost and the elasticity of substitution between housing and nonhousing consumption. In particular, compared with the benchmark, the impact of the shocks on homeownership rates is reduced, but the impact on nonhousing consumption is magnified when the house selling cost is sizable or when housing service and nonhousing consumption are highly substitutable.

Keywords: Life Cycle, Housing Adjustment Costs, Intratemporal Substitution

JEL Classification: E21, R21

Suggested Citation

Li, Wenli and Liu, Haiyong and Yang, Fang and Yao, Rui, Housing Over Time and Over the Life Cycle: A Structural Estimation (January 7, 2015). FRB of Philadelphia Working Paper No. 15-04. Available at SSRN: https://ssrn.com/abstract=2554593 or http://dx.doi.org/10.2139/ssrn.2554593

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

Fang Yang

Louisiana State University, Baton Rouge ( email )

Baton Rouge, LA 70803
United States

HOME PAGE: http://faculty.bus.lsu.edu/fyang/

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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