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Working Paper
Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints
We quantify the role of heterogeneity in households’ financial constraints in explaining the large decline in consumption between 2006 and 2009. Using household-level data, we show that in addition to a direct effect of changes in house prices, there are sizable indirect effects from general equilibrium feedback and bank health. About 60% of the aggregate response of consumption to changes in house prices is explained by ex-ante and ex-post financial constraints, where only a specific set of households face binding ex-post financial constraints as a result of declining house prices. We find ...
Working Paper
How Big is the Wealth Effect? Decomposing the Response of Consumption to House Prices
We investigate the effect of declining house prices on household consumption behavior during 2006-2009. We use an individual-level dataset that has detailed information on borrower characteristics, mortgages and credit risk. Proxying consumption by individual-level auto loan originations, we decompose the effect of declining house prices on consumption into three main channels: wealth effect, household financial constraints, and bank health. We find a negligible wealth effect. Tightening householdlevel financial constraints can explain 40-45 percent of the response of consumption to declining ...