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Booms and Busts in Housing and Consumption

Paper Session

Sunday, Jan. 8, 2017 3:15 PM – 5:15 PM

Hyatt Regency Chicago, Toronto
Hosted By: American Economic Association
  • Chair: Kurt Mitman, IIES-Stockhom University

Consumption and House Prices in the Great Recession: Model Meets Evidence

Greg Kaplan
,
Princeton University
Kurt Mitman
,
IIES-Stockhom University
Giovanni L. Violante
,
New York University

Abstract

How much of the sharp drop in US nondurable consumption around the Great Recession was caused by the collapse of house prices? Existing empirical analyses combining geographical variation with the Saiz instrument place the elasticity of nondurable consumption to housing net worth in the range 0.35-0.40. We provide additional evidence, based on entirely different data sources, that elasticities of this magnitude are empirically plausible. We then build an heterogeneous-agent incomplete-markets model of the US economy with various aggregate shocks (income, financial deregulation, and beliefs) leading to fluctuations in equilibrium house prices. Through a series of counterfactual numerical experiments, we find that shocks to beliefs explain the majority of the boom and bust in house prices, but that credit conditions are important for understanding foreclosure, home ownership and leverage dynamics. We find that the majority of the drop in consumption during the great recession can be attributed to movements in house prices.

House Prices and Consumer Spending

David Berger
,
Northwestern University
Veronica Guerrieri
,
University of Chicago
Guido Lorenzoni
,
Northwestern University
Joseph Vavra
,
University of Chicago

Abstract

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 a new measure of house price effects.

Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession

Carlos Garriga
,
Federal Reserve Bank of St. Louis
Aaron Hedlund
,
University of Missouri

Abstract

Using a model with housing search, endogenous credit constraints, and mortgage default, this paper quantitatively accounts for the housing crash from 2006 to 2011 and assesses its implications for aggregate and cross-sectional consumption during the Great Recession. Tighter downpayment requirements and higher downside labor market risk emerge as primary culprits. An endogenous decline in housing liquidity amplifies the recession by increasing foreclosures, contracting credit, and depressing consumption. Household balance sheets act as a transmission mechanism from housing to consumption that depends on gross portfolio positions and the leverage distribution. Low interest rate policies accelerate the recovery in housing and consumption.

Housing Freezes, Deleveraging, and Aggregate Demand

Christian Bayer
,
University of Bonn
Ralph Luetticke
,
University College London

Abstract

This paper develops a general equilibrium model of incomplete markets, liquid paper assets and illiquid housing. In this model the liquidity of housing fluctuates stochastically over time. A decrease in the liquidity of housing leads to an increased demand for liquid paper assets and a decrease in demand for houses (as assets). We show that the model generates substantial business cycle effects of fluctuations in housing liquidity on housing prices, employment and output, while being in line with relatively small fluctuations in rental rates of housing.
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • E3 - Prices, Business Fluctuations, and Cycles