Housing Wealth Effects: The Long View

93 Pages Posted: 18 Jun 2018

See all articles by Adam M. Guren

Adam M. Guren

Boston University - Department of Economics

Alisdair McKay

Boston University - Department of Economics

Emi Nakamura

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Jon Steinsson

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 2018

Abstract

We provide new time-varying estimates of the housing wealth effect back to the 1980s. These estimates are based on a new identification strategy that exploits systematic differences in city-level exposure to regional house price cycles as an instrument for house prices. Our estimates of housing wealth effects are substantially more precise and smaller than recent estimates, though they remain economically important. Our time-varying estimates indicate that housing wealth effects were not particularly large in the 2000s. This contradicts a popular narrative that lax lending standards in the boom and skyrocketing loan-to-value (LTV) ratios during the bust elevated the housing wealth effect in the 2000s. We show, furthermore, that this narrative is inconsistent with a standard life-cycle model with borrowing constraints, uninsurable income risk, illiquid housing, and long-term mortgages. The housing wealth effect in the model is relatively insensitive to changes in the distribution of LTV for two reasons: First, impatient low- LTV agents have a high elasticity; Second, a rightward shift in the LTV distribution increases not only the number of highly sensitive constrained agents but also the number of underwater agents whose consumption is insensitive to house prices.

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Suggested Citation

Guren, Adam M. and McKay, Alisdair and Nakamura, Emi and Steinsson, Jon, Housing Wealth Effects: The Long View (June 2018). NBER Working Paper No. w24729. Available at SSRN: https://ssrn.com/abstract=3198043

Adam M. Guren (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

HOME PAGE: http://people.bu.edu/guren/

Alisdair McKay

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

HOME PAGE: http://people.bu.edu/amckay

Emi Nakamura

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jon Steinsson

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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