House Prices and Consumer Spending

Working Paper No. 21667 Recent empirical work shows large consumption responses to house price movements. Can consumption theory explain these responses? We consider a variety of consumption models with uninsurable income risk and show that consumption responses to permanent house price shocks can b...

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Bibliographic Details
Published inNBER Working Paper Series p. 21667
Main Authors David Berger Veronica Guerrieri, Lorenzoni, Guido, Vavra, Joseph
Format Paper
LanguageEnglish
Published Cambridge National Bureau of Economic Research, Inc 01.10.2015
Subjects
Approximation
Collateral
Consumer credit
Consumer spending
Consumption
Cost control
Economic conditions
Economic models
Economic theory
Endowment
Households
Housing
Housing prices
Propensity to consume
Real estate sales
Recessions
Rentals
Studies
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Summary:Working Paper No. 21667 Recent empirical work shows large consumption responses to house price movements. Can consumption theory explain these responses? We consider a variety of consumption models with uninsurable income risk and show that consumption responses to permanent house price shocks can be approximated by a simple "sufficient-statistic" formula: the marginal propensity to consume out of temporary income times the value of housing. Calibrated versions of the models generate house price effects that are both large and sensitive to the level of household debt in the economy. We apply our formula to micro data to provide new measures of house price effects.
ISSN:0898-2937
DOI:10.3386/w21667