House Prices and Consumer Spending< /strong>
Abstract:
The paper studies the effects of house prices on consumption in a life-cycle model with income uncertainty and precautionary savings. Fi rst, we focus on the response of consumption to a one-time, permanent incre ase in house prices. We show that, with Cobb-Douglas preferences, the indiv idual response is given by a simple formula: the marginal propensity to con sume out of temporary income times housing holdings. In the aggregate, the model can generate very large effects of house prices of consumption—with a n elasticity of 0.3-0.4 for working age households—because it features an e ndogenous distribution in which some households have substantial housing ho ldings and, at the same time, are highly levered and have high MPC. We exte nd the model to allow for fixed costs of adjustment in housing and for a re ntal option. Our simple formula continues to be a good approximation in the extended model. Aggregate elasticities are still sizeable—in the order of 0.1-0.15—-but smaller than in the baseline, because agents with low net wor th tend to self-select into renting. Next, we use the model to explore the consumption implications of a boom-bust in house prices. To generate a boom -bust in residential investment, we introduce time-varying expectations of future housing appreciation. The model’s high elasticities contribute to ge nerate substantial fluctuations in consumption as a result of house price d ynamics. The endogenous evolution of household debt plays a crucial role, a s the increased leverage in the boom phase contributes substantially to the consumption contraction when the boom ends.
DTSTAMP:20260404T064145Z DTSTART:20150608T130000Z DTEND:20150608T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR