The Life-Cycle Effects of House Price Changes

The authors develop a life-cycle model to study the effects of house price changes on household consumption and welfare. The model explicitly incorporates the dual feature of housing as both a consumption good and an investment asset and allows for costly adjustments in housing and mortgage positions. Li and Yao's analysis indicates that although house price changes have small aggregate effects, their consumption and welfare consequences on individual households vary significantly. In particular, the non-housing consumption of young and old homeowners is much more sensitive to house price changes than that of middle-aged homeowners. More importantly, while house price appreciation increases the net worth and consumption of all homeowners, it only improves the welfare of middle-aged and old homeowners. Young homeowners and renters are worse off due to higher life-cycle housing consumption costs.

[1]  C. Carroll,et al.  Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis , 1996 .

[2]  John D. Benjamin,et al.  Real Estate Versus Financial Wealth in Consumption , 2004 .

[3]  S. Zeldes,et al.  Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence , 1989 .

[4]  George Tauchen,et al.  Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models , 1991 .

[5]  Chris I. Telmer,et al.  Consumption and Risk Sharing Over the Life Cycle , 2000 .

[6]  M. Spiegel,et al.  Joint Center for Housing Studies Harvard University The Policy Implications of Portfolio Choice in Underserved Mortgage Markets , 2002 .

[7]  Sven Rady,et al.  Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints , 2001, SSRN Electronic Journal.

[8]  M. Chambers,et al.  Accounting for Changes in the Homeownership Rate , 2007 .

[9]  Rui Yao,et al.  Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints , 2004 .

[10]  P. Speckman.  Kernel smoothing in partial linear models , 1988 .

[11]  D. Wise,et al.  Aging and Housing Equity , 2000 .

[12]  R. Shiller,et al.  Comparing Wealth Effects: The Stock Market Versus the Housing Market , 2001 .

[13]  Martin Schneider,et al.  Housing, Consumption, and Asset Pricing , 2006 .

[14]  Morris a. Davis,et al.  Housing, House Prices, and the Equity Premium Puzzle , 2005 .

[15]  João F. Cocco,et al.  How Do House Prices Affect Consumption? Evidence from Micro Data , 2004 .

[16]  T. Davidoff.  Maintenance and the Home Equity of the Elderly , 2004 .

[17]  E. Lazear,et al.  Family Size and the Distribution of Per Capita Income , 1981 .

[18]  Robert J. Shiller,et al.  Comparing Wealth Effects: The Stock Market versus the Housing Market , 2001 .

[19]  Using Home Maintenance and Repairs to Smooth Variable Earnings , 2003 .

[20]  Pravin Varaiya,et al.  Life cycle consumption and homeownership , 1978 .

[21]  Owner-Occupied Housing and the Composition of the Household Portfolio , 2002 .

[22]  Pascal J. Maenhout,et al.  Consumption and Portfolio Choice over the Life Cycle , 2005 .

[23]  Tracy M. Turner.  Does Investment Risk Affect the Housing Decisions of Families , 2003 .

[24]  Ellen R. McGrattan,et al.  The optimum quantity of debt , 1998 .

[25]  A. Deaton.  Saving and Liquidity Constraints , 1989 .

[26]  D. McFadden,et al.  The Dynamics of Housing Demand by the Elderly: Wealth, Cash Flow, and Demographic Effects , 1987 .

[27]  M. Gervais.  Housing Taxation and Capital Accumulation , 2002 .

[28]  Erik Hurst,et al.  Home is Where the Equity Is : Liquidity Constraints , Refinancing and Consumption , 2002 .

[29]  João F. Cocco,et al.  Portfolio Choice in the Presence of Housing , 2000 .

[30]  Stijn Van Nieuwerburgh,et al.  Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perspective , 2003 .

[31]  T. Yamashita,et al.  Owner-Occupied Housing and the Composition of the Household Portfolio Over the Life-Cycle , 1998 .

[32]  R. N. Anderson,et al.  United States life tables, 1998. , 2001, National vital statistics reports : from the Centers for Disease Control and Prevention, National Center for Health Statistics, National Vital Statistics System.

[33]  C. Carroll,et al.  The Nature of Precautionary Wealth , 1995 .

[34]  Stavros Peristiani,et al.  Structural Change in the Mortgage Market and the Propensity to Refinance , 1998 .

[35]  A. Deaton.  The Analysis of Household Surveys : A Microeconometric Approach to Development Policy , 1997 .

[36]  Jesús Fernández-Villaverde,et al.  CONSUMPTION AND SAVING OVER THE LIFE CYCLE: HOW IMPORTANT ARE CONSUMER DURABLES? , 2011, Macroeconomic Dynamics.