The Housing Wealth Effect in the Post-Great Recession Period: Evidence from Big Data

In this report, we examine the housing wealth effect channel of monetary policy and measure the increase in consumption as a result of the large increase in house prices after the Great Recession using administrative banking data, including transaction-level deposit and credit card data and loan-level mortgage data. Our results suggest that the MPC out of housing wealth for 2012 to 2018 is much smaller than estimates for prior periods and, is in fact, between zero and 1.6 cents. We also find near zero MPCs for each year between 2012 and 2018 and even for subgroups with the greatest access to liquidity—more home equity, more available credit on credit cards, and more liquid assets. We reconcile this near zero MPC out of housing wealth in the post-Great Recession period with a larger MPC during the preceding periods by noting that the volume of home equity withdrawal in the post-Great Recession period was much lower than during the housing boom. Our findings have important implications, particularly in light of the COVID-19 pandemic and its unprecedented economic impacts. Efforts to boost consumption that focus on increasing homeowners’ liquidity, such as reducing frictions to accessing home equity, would be most successful but also carry risks in a recession when home prices are likely to depreciate and increased income volatility may translate into more credit risk. A smaller housing wealth effect diminishes the ability of conventional monetary policy to affect the real economy through the housing market, resulting in lower consumption and GDP growth than might otherwise be expected. Policymakers may need to lean more heavily on other channels of monetary policy and unconventional measures, as well as fiscal policies that provide households with liquidity.