Asymmetry in the extracted housing wealth effects on consumption

Abstract

This paper investigates the nonlinear long run relationship between extracted housing wealth and consumption under the consumption-smoothing and financial motivations of households in the USA. By applying the methodology of two-regime threshold cointegration in vector error correction model developed by Hansen and Seo (2002), the paper finds that the motivation behind withdrawing equity depends on the threshold variable of differential between mortgage and saving returns. The findings clearly establish that there exists a significant asymmetric effect of housing wealth on consumption in the USA.