New Evidence on Housing Wealth and Consumption Channels

The Journal of Real Estate Finance and Economics, January 2019, Volume 58, Issue 1, pp 51–79

Posted: 15 May 2019 Last revised: 31 Aug 2020

See all articles by Bing Zhu

Bing Zhu

University of Reading - Henley Business School

Lingxiao Li

California State University, Fullerton

David H. Downs

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate; The Kornblau Institute

Steffen P. Sebastian

University of Regensburg - International Real Estate Business School (IREBS)

Date Written: January 16, 2019

Abstract

This paper provides new evidence on the effect of housing wealth on consumption by focusing on the impact of home-equity extraction. We develop a household consumption decision model to illustrate the differential effect of home-equity extraction, relative to net home equity, on consumption. The home-equity extraction channel is also shown to vary with household-lever borrowing constraints. Based on U.S. household survey data and an instrumental-variables approach, our empirical results validate model predictions. We find that the marginal propensity to consume is two times higher for the home-equity extraction channel relative to the conventional housing wealth effect. The consumption effect of home-equity extraction is more than 2.5 times greater for liquidity-constrained households than for unconstrained households. These results are even more pronounced in the case of durable goods consumption for constrained borrowers.

Keywords: Consumption; Housing wealth; Home-equity credit; Liquidity constraint

JEL Classification: E21, R22, G21

Suggested Citation

Zhu, Bing and Li, Lingxiao and Downs, David H. and Sebastian, Steffen P., New Evidence on Housing Wealth and Consumption Channels (January 16, 2019). The Journal of Real Estate Finance and Economics, January 2019, Volume 58, Issue 1, pp 51–79, Available at SSRN: https://ssrn.com/abstract=3373272

Bing Zhu

University of Reading - Henley Business School ( email )

Greenlands
Henley, RG9 3AU
United Kingdom

Lingxiao Li

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

David H. Downs (Contact Author)

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284-4000
United States

The Kornblau Institute ( email )

Richmond, VA 23284-4000
United States

Steffen P. Sebastian

University of Regensburg - International Real Estate Business School (IREBS) ( email )

Universitaetsstrasse 31
Regenburg, Bavaria 93040
Germany
+49(941)943-5081 (Phone)
+49(941)943-5082 (Fax)

HOME PAGE: http://www.irebs.de

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