Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints

63 Pages Posted: 3 Oct 2022

See all articles by S. Boragan Aruoba

S. Boragan Aruoba

University of Maryland

Ronel Elul

Federal Reserve Bank of Philadelphia

Sebnem Kalemli-Ozcan

University of Maryland

Date Written: September 1, 2022

Abstract

We quantify the role of heterogeneity in households’ financial constraints in explaining the large decline in consumption between 2006 and 2009. Using household-level data, we show that in addition to a direct effect of changes in house prices, there are sizable indirect effects from general equilibrium feedback and bank health. About 60% of the aggregate response of consumption to changes in house prices is explained by ex-ante and ex-post financial constraints, where only a specific set of households face binding ex-post financial constraints as a result of declining house prices. We find a negligible wealth effect once we account for the role of heterogonous financial constraints.

Keywords: financial crisis, mortgage, individual-level data, general equilibrium, bank health, credit supply

JEL Classification: O16, E32

Suggested Citation

Aruoba, S. Boragan and Elul, Ronel and Kalemli-Ozcan, Sebnem, Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints (September 1, 2022). FRB of Philadelphia Working Paper No. 22-34, Available at SSRN: https://ssrn.com/abstract=4232684 or http://dx.doi.org/10.21799/frbp.wp.2022.34

S. Boragan Aruoba (Contact Author)

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Ronel Elul

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3965 (Phone)

Sebnem Kalemli-Ozcan

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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