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Title: Consumption responses to house price heterogeneity
Citation Type: Miscellaneous
Publication Year: 2017
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Abstract: Movements in house prices may affect household consumption through wealth, collateral, income, or substitution effects. However, individual and aggregate consumption responses depend on whether house prices are moving due to aggregate, regional, local, neighborhood , or idiosyncratic shocks. I first show that there is significant city-, neighborhood-, and idiosyncratic-level variation in house prices. Second, I show that the different components of house price movements are associated with different consumption movements. Using a large panel of consumers over the period 2004-2015, I find that aggregate price movements are associated with the largest consumption movements, however neighborhood-level price movements have a stronger effect than city-level price movements. There are theoretical reasons to think that different components of house price movements should have differential effects on consumption. Previous work has shown that older homeowners have larger consumption responses to house price rises than younger households since older homeowners are more likely to downsize or sell their housing stock, implying future housing costs for them are lower, which generates a net positive wealth effect (Campbell and Cocco (2007)). The same logic applies to movements across locations. Households are more likely to move across counties or neighborhoods than they are to move across cities, states, or regions. Thus, a house price increase in a particular neighborhood generates a wealth effect for households likely to move to other neighborhoods. A house price increase in a city does not generate a similar consumption response if a household never intends to leave the city. To investigate this mechanism I then build a partial equilibrium, life-cycle model with heterogeneous agents to explore the effect on consumption of different levels of house price shocks.
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Authors: Graham, James
Publisher: New York University
Data Collections: IPUMS CPS
Topics: Housing and Segregation
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