Consumption Commitments and Housing Dynamics

Abstract

Using a measure of local long-run growth prospects, I uncover a novel link between economic fundamentals and house prices. While excess housing returns are positively associated with economic growth prospects, housing valuations are negatively associated with shocks to growth prospects. I document an explanation in metro-area consumption: housing consumption is asymmetrically exposed to economic prospects; it expands more quickly when prospects are strong than it contracts when prospects are poor. I explain these findings through the lens of an asset pricing model that focuses on a tradeoff between nonseparable committed housing and nonhousing consumption.

Keywords: Asset Pricing, Consumption Commitments, Long-Run Risk, Real Estate

JEL Classification: D81, E21, G11, G12, R30