Housing wealth effects: the long view
Files
Accepted manuscript
Date
2021-03-01
Authors
Guren, Adam
McKay, Alisdair
Nakamura, Emi
Steinsson, Jón
Version
Accepted manuscript
OA Version
Citation
Adam M Guren, Alisdair McKay, Emi Nakamura, Jón Steinsson, Housing Wealth Effects: The Long View, The Review of Economic Studies, Volume 88, Issue 2, March 2021, Pages 669–707, https://doi.org/10.1093/restud/rdaa018
Abstract
We provide new time-varying estimates of the housing wealth effect back to the 1980s. We
use three identification strategies: OLS with a rich set of controls, the Saiz housing supply
elasticity instrument, and a new instrument that exploits systematic differences in city-level
exposure to regional house price cycles. All three identification strategies indicate that housing
wealth elasticities were if anything slightly smaller in the 2000s than in earlier time periods.
This implies that the important role housing played in the boom and bust of the 2000s was due
to larger price movements rather than an increase in the sensitivity of consumption to house
prices. Full-sample estimates based on our new instrument are smaller than recent estimates,
though they remain economically important. We find no significant evidence of a boom-bust
asymmetry in the housing wealth elasticity. We show that these empirical results are consistent
with the behavior of the housing wealth elasticity in a standard life-cycle model with borrowing
constraints, uninsurable income risk, illiquid housing, and long-term mortgages. In our model,
the housing wealth elasticity is relatively insensitive to changes in the distribution of LTV for
two reasons: First, low-leverage homeowners account for a substantial and stable part of the
aggregate housing wealth elasticity; Second, a rightward shift in the LTV distribution increases
not only the number of highly sensitive constrained agents but also the number of underwater
agents whose consumption is insensitive to house prices.