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Housing and Cyclical Dynamics

Paper Session

Sunday, Jan. 5, 2020 1:00 PM - 3:00 PM (PDT)

Manchester Grand Hyatt, Regatta C
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Lu Han, University of Toronto

Consumption of Housing During the 2000s Boom: Evidence and Theory

Lara Loewenstein
,
Federal Reserve Bank of Cleveland

Abstract

Housing accounts for about 18 percent of personal consumption expenditures. Over the period 1998-2007, the price of houses increased over 50 percent relative to the price of consumption goods. In this paper I investigate the household consumption responses to this massive change in relative prices using the Panel Study of Income Dynamics matched with detailed geographic information for individual households. The main findings are that (1) households that already owned homes (continuing homeowners) bought larger homes while only marginally increasing their expenditures on non-housing goods and services; (2) in areas with high house price growth, renters became significantly less likely to transition into homeownership, and those that did bought smaller homes; and (3) my empirical results can be explained by optimistic beliefs for future rents that increased both the present price of housing and expectations for future prices. Higher expected capital gains lowered the user cost of owner occupied housing, increasing demand for housing services, while the debt-to-income constraint and higher current house prices limited the transition of renters into homeownership.

Do Housing Markets Affect Local Consumer Prices? - Evidence from United States Cities

C.Y. Choi
,
University of Texas-Arlington
Soojin Jo
,
Bank of Canada

Abstract

Using city-level retail price data for a bundle of consumer products in the U.S., we find that changes in house price exert an important causal/leading influence on local consumer prices, but not vice versa. On average a 10% increase in house prices is associated with a 4.6% increase in consumer prices over the past three decades. Moreover, there is considerable heterogeneity in the transmission across locations and across products. The interplay between housing supply constraints and productivity gap across cities is the key to the geographical heterogeneity. Whereas housing demand shocks have a stronger impact on local consumer prices in the cities with higher concentration of college graduates, the impact of housing supply shocks is stronger in the cities with more stringent regulations on housing supply. At the product level, housing demand shocks are transmitted primarily through flexibly-priced products, while the pass-through of housing supply shock to CPs is significant in the products that are produced locally. Our results suggest that markup effect is at work in the pass-through of housing demand shock (rather than conventional channels of wealth effect or collateral effect), while local cost effect is at work in the pass-through of housing supply shock.

Unemployment and the United States Housing Market during the Great Recession

Pavel Krivenko
,
City University of New York-Baruch College

Abstract

This paper studies the recent U.S. housing bust in a quantitative lifecycle model using panel data from the Survey of Consumer Finances. The model features an income process that is consistent with the large and long-lasting impact of unemployment on future earnings documented in recent empirical work. It also features exogenous moving shocks consistent with survey evidence which shows that many households move for reasons unrelated to their financial situation. In addition to endogenous moves, the exogenous moving shocks help match the distribution of movers in the data: they are younger, have lower wealth, and less secure jobs -- that makes movers more sensitive to credit and labor market conditions. As a result, moving shocks amplify the quantitative importance of unemployment and credit shocks in the recent bust and help the model match the observed decline in house prices. A mortgage subsidy (HAMP) helps stabilize prices and reduce foreclosures even if the information about it is limited and only a small fraction of households is eligible.

The Propagation of Demand Shocks Through Housing Markets

Elliot Anenberg
,
Federal Reserve Board
Daniel Ringo
,
Federal Reserve Board

Abstract

The presence of incumbent homeowners creates a friction in housing markets, as incumbents wait to match with a buyer for their current home before buying their next home. As a result, demand stimulus can produce a multiplier effect by freeing up owners attempting to sell their current home, allowing them to re-enter the market as buyers. Exploiting a shock to housing demand caused by the 2015 surprise cut in Federal Housing Administration mortgage insurance premiums, we find that homeowners buy their next home sooner when the probability of their current home selling increases. This effect is especially pronounced in cold housing markets, in which homes take a long time to sell. We build and calibrate a model of the joint buyer-seller decision that explains these findings as a result of homeowners avoiding the cost of owning two homes simultaneously. Simulations of the model demonstrate that stimulus to home buying generates a substantial multiplier effect, particularly in cold housing markets.
Discussant(s)
Edward Kung
,
University of California-Los Angeles
Liang Peng
,
Pennsylvania State University
Jack Favilukis
,
University of British Columbia
Eric Smith
,
University of Essex
JEL Classifications
  • R2 - Household Analysis
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy