New Evidence on Housing Wealth and Consumption Channels
The Journal of Real Estate Finance and Economics, January 2019, Volume 58, Issue 1, pp 51–79
Posted: 15 May 2019 Last revised: 31 Aug 2020
Date Written: January 16, 2019
This paper provides new evidence on the effect of housing wealth on consumption by focusing on the impact of home-equity extraction. We develop a household consumption decision model to illustrate the differential effect of home-equity extraction, relative to net home equity, on consumption. The home-equity extraction channel is also shown to vary with household-lever borrowing constraints. Based on U.S. household survey data and an instrumental-variables approach, our empirical results validate model predictions. We find that the marginal propensity to consume is two times higher for the home-equity extraction channel relative to the conventional housing wealth effect. The consumption effect of home-equity extraction is more than 2.5 times greater for liquidity-constrained households than for unconstrained households. These results are even more pronounced in the case of durable goods consumption for constrained borrowers.
Keywords: Consumption; Housing wealth; Home-equity credit; Liquidity constraint
JEL Classification: E21, R22, G21
Suggested Citation: Suggested Citation