House Prices and Consumption: A New Instrumental Variables Approach
52 Pages Posted: 12 Dec 2018 Last revised: 10 Feb 2019
Date Written: November 15, 2018
Fluctuations in house prices can generate large movements in household expenditure. However, empirical work exploring this relationship must deal with the endogeneity problems associated with using house prices as a regressor. A popular instrumental variables strategy exploits cross-sectional variation in house prices as predicted by the local housing supply elasticities of Saiz (2010). As an alternative, I introduce a Bartik instrument for house prices that consists of the interaction between the pre-existing local supply of housing characteristics and broad changes in the relative demand for those characteristics. I show that the instrument is a strong predictor of house price growth in both the cross-section and through time. I then use household panel data on non-durable expenditures to estimate the elasticity of consumption with respect to local house price growth. I report precise estimates in the range of 0.10 to 0.15, which correspond to marginal propensities to consume out of housing wealth of 1.2 to 1.8 cents in the dollar. These estimates are robust to controls for aggregate fluctuations, local business cycles, and local industry and demographic composition. In contrast, estimates I show that the traditional housing supply elasticity instrument produces inconsistent estimates when confronted with these same controls. Thus, the Bartik instrument succeeds in generating plausibly exogenous variation in house prices when housing supply elasticity instruments may fail. When decomposing variation in the Bartik instrument, I find that the identified consumption response to house prices is largely driven by times and locations where house prices varied the most: during the 2008 recession and in the Western US.
Keywords: Consumption, House Prices, Instrumental Variables, Bartik Instrument
JEL Classification: E21, E32, C26, R21
Suggested Citation: Suggested Citation