House Price Gains and US Household Spending from 2002 to 2006

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Date Published 2014
Primary Author Atif Mian, Amir Sufi
Other Authors
Theme Housing and Wealth Creation, Real Estate Cycles and Bubbles


We examine the effect of rising U.S. house prices on borrowing and spending from 2002 to 2006. Households in low income zip codes aggressively liquefy home equity when house prices rise, and they also increase spending substantially. In contrast, for the same rise in house prices, households living in high income zip codes are unresponsive, both in their borrowing and spending behavior. This cross-derivative is consistent with models where house price changes act as cash-on-hand shocks to low cash-on-hand households, who have a high marginal propensity to consume out of such shocks. Almost all of the spending out of housing wealth is through the home-equity borrowing channel. These results are unlikely to be driven by unobservable changes in non-housing wealth, given that low income zip codes are experiencing lower wage growth during this period. After 2006, the households that borrowed and spent the most aggressively out of housing wealth during the boom experience lower income and spending growth.

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