Home Equity Borrowing and the Boom-Bust Cycle in Consumption and Residential Investment
71 Pages Posted: 17 Oct 2016 Last revised: 24 Jun 2020
Date Written: July 5, 2019
U.S. consumption and residential investment experienced boom-bust cycles in the 2000s that coincided with large fluctuations in the borrowing of existing homeowners. While previous studies have recognized the role of home equity-based borrowing for consumption fluctuations, I show that home equity-based borrowing is even more important for understanding the cycle in residential investment. I present evidence from microdata that this borrowing is strongly associated with owner-occupied housing investment, especially among young homeowners. To rationalize this finding, I develop a quantitative life-cycle model that features multiple types of housing investment. In the model, young households are unable to move into their target home because of financial constraints. They start with a small house and make lumpy housing investments when they have accumulated enough home equity. As in the data, housing investment of young homeowners is more responsive to aggregate shocks than their consumption. My analysis suggests that home equity borrowing and the demographic structure of U.S. households are important in explaining residential investment dynamics.
Keywords: Home Equity Borrowing, Consumption, Residential Investment, House Prices, Mortgage Rates, Business Cycle
JEL Classification: D1, E2, E3
Suggested Citation: Suggested Citation