Housing Prices and the Savings of Renters

Abstract

This paper studies the effects of housing prices on the net worth of young households. Because prospective homeowners must accumulate down payments, a change in housing prices can change their savings patterns. Theoretically, the effect of increases in house prices on savings is ambiguous, because households can increase their saving to afford the larger down payment, or decrease their saving because they have chosen to delay or forego purchasing a house. Using data from the 1984 Panel Study of Income Dynamics [27], I show that empirically, the effect of increased housing prices on saving is positive, and quite large relative to the savings of young households. Young renter households living in cities with high housing prices have more net worth than those living in cities with lowering housing prices, controlling for both the income of the households, as well as the per capita income of the city in which they live.