The Housing Wealth Effect: The Crucial Roles of Demographics, Wealth Distribution and Wealth Shares

Abstract

Current estimates of housing wealth effects vary widely. While some of this variation reflects data limitations and inappropriate estimators, we also consider the role of omitted variables suggested by economic theory that have been absent in a number of prior studies. In particular, our estimates of housing wealth effects take into account age composition and wealth distribution (using poverty rates as a proxy), as well as wealth shares (how much of total wealth is comprised of housing vs. stock wealth). We exploit cross-state variation in housing, stock wealth and other variables in a newly assembled panel data set and find that the impact of housing on consumer spending depends crucially on age composition, poverty rates, and the housing wealth share. In particular, young people who are more likely to be credit-constrained, and older homeowners, likely to be “trading down” on their housing stock, experience the largest housing wealth effects, as suggested by theory. Also, as suggested by theory, housing wealth effects are higher in state-years with higher housing wealth shares, and in state-years with higher poverty rates (likely reflecting the greater importance of credit constraints for those observations). Taking these various factors into account implies huge variation over time and across states in the size of housing wealth effects. Finally, the fact that (contrary to theory) observed housing wealth effects are larger than stock wealth effects likely reflects the higher volatility of stock wealth and the relatively small proportion of the population that owns stock.