Housing Net Worth Research Articles

Local Effects of Global Capital Flows: A China Shock in the U.S. Housing Market

Abstract This paper studies the real effects of foreign real estate capital inflows. Using transaction-level data, we document (i) a “China shock” in the U.S. housing market characterized by surging foreign Chinese housing purchases after 2008, and (ii) “home bias” in these purchases, as they concentrate in neighborhoods historically populated by ethnic Chinese. Exploiting their temporal and spatial variation, we find that these capital inflows raise local employment, with the effect transmitted through a housing net worth channel. However, they displace local lower-income residents. Our results show that real estate capital inflows can both stimulate the real economy and induce gentrification.

Labour Market Fluctuations and the Housing Net Worth Channel in the EU

The credit-driven housing net worth channel has been identified as a determinant of the sharp drop in US employment between 2007 and 2009. We examine the impact of this channel on the labour market in the EU using panel data for 20 countries covering the period 1996 to 2017. This period saw substantial changes in both credit provision and labour market performance in the EU. The full sample results show changes in housing net wealth having a significant influence on total employment and its traded and non-traded components, with a one per cent change in housing net wealth being associated with about a 0.2 per cent change in total employment. Coefficient values are larger when changes in non-traded employment are the dependent variable, while the wealth effect is greater when negative housing net wealth shocks occur. In contrast to the US evidence, we find significant wage responses to housing net worth shocks arising in the EU.

The housing net worth channel and the public finances: evidence from a European country panel

The housing net worth channel and the public finances: evidence from a European country panel

The Impact of Health on Wealth: Empirical Evidence

This paper empirically evaluates the impact of health on wealth. Using the frailty index as a measure of health and carefully accounting for the dynamic relationship between frailty and wealth, I find that su˙ering one more health deficit leads, on average, to a 2.45 percent decline in the household net worth of individuals between age 50 and 100. The household net worth of individuals with no college degree, poor health, and over the age of 70 is significantly negatively a˙ected by poor health. The results pass the tests of instrument validity and are consistent across several alternative definitions of wealth. Using financial net worth as a definition of wealth, I find that the average impact of frailty on wealth is the largest, while it is the smallest when wealth is defined to include only housing net worth.

Consumption and housing net worth: Cross-country evidence

Using a 22-country OECD panel from 1996 to 2017, we examine the extent to which the housing net worth channel affects personal consumption internationally during a period of considerable variation in house prices and credit provision. We identify an asymmetrical response where declines in housing net worth have a much greater impact on consumption than arises for positive changes in net worth.

House Prices and the Credit-Driven Household Demand Channel: The Case of the Irish Economy

The performance of the Irish economy stands out across western economies over the past two decades as the later years of its “Celtic Tiger” phase gave way to a sharp and extremely large economic downturn between 2008 and 2012. This severe recession has been followed by a Lazarus-style economic recovery in recent years. This paper examines the role played by the credit-driven housing net worth channel in the path that Irish economic performance has taken between 2002 and 2019 by specific reference to developments in the domestic labour market. We find a significant positive relationship between housing net worth and employment growth in Ireland, manifesting itself through the non-traded sector of the economy between 2007 and 2012. This followed the emergence and then bursting of a substantial credit-fuelled housing market bubble in the Irish residential property market. Our analysis indicates no evident link between economic activity and a credit-driven housing net worth channel in recent years. This may reflect market and regulatory responses to the banking crisis-led recession of the late 2000s and early 2010s.

Flip or Flop? Tobin Taxes in the Real Estate Market

This paper analyzes the effects of transfer taxes targeting property flips on house prices and investment decisions. We study a 2011 reform in Taiwan which required sellers of non-owner occupied properties to pay a surcharge of up to 15% of the full sale price for properties held for two years or less. Linking the universe of personal income tax returns to transaction records, we show immediate and substantial bunching at the two-year holding period threshold, but negligible changes in overall prices. According to our missing mass estimates, the tax generated a 75% drop in one-year flips and a 40% drop in overall second home sales volume. We use shocks to housing net worth from inheritances received after decedents’ untimely deaths to show that investors with more portfolio exposure pass through the tax to buyers. While low-wealth out-of-town investors account for most of the drop in sales volume, locals and non-residents earn similar holding period returns in the pre-reform period. We use spatial and time variation in the severity of typhoon seasons to estimate a 20% share of noise trading prior to the reform. We combine our estimates of the noise trading share and change in short-term sales volume to parametrize a model of optimal financial transaction taxes. The optimal transfer tax on short-term sales is 4%, at most, which is close to the flat transfer tax rates imposed in most major real estate markets. Our results point to market segmentation and inventory effects as key constraints on the effectiveness of property flip taxes towards promoting housing affordability.

Local Effects of Global Capital Flows: A China Shock in the U.S. Housing Market

We show that foreign real estate capital inflows have positive real effects and adverse distributional consequences. Using transaction-level data, we document (i) a China shock in the U.S. housing market characterized by surging foreign Chinese housing purchases after 2008; and (ii) home bias in these purchases, as they concentrate in neighborhoods historically populated by ethnic Chinese. Exploiting their temporal and spatial variation, we find that these capital inflows raise local house prices and employment, with the employment effect transmitted through a housing net worth channel. At the same time, they crowd out low-income residents and widen economic inequality across neighborhoods.

Capital Flows, Asset Prices, and the Real Economy: A "China Shock" in the U.S. Real Estate Market

We study the effects of foreign real estate capital flows on local asset prices and employment using detailed housing transactions data. We document (i) a "China shock" in the U.S. real estate market after 2007 driven by the Chinese government's house purchase restrictions and (ii) "home bias" in foreign Chinese housing purchases in the United States as they are concentrated in ZIP codes historically populated by ethnic Chinese. Exploiting the quasi-random temporal and spatial variation of real estate capital inflows from China, we find that foreign Chinese housing purchases have a positive and significant effect on local housing and labor markets. A one standard deviation increase in exposure to these purchases explains 24% and 18% of the cross-ZIP-code variation in local house prices and employment, respectively, with the employment effect transmitted through a housing net worth channel. We also show that these purchases drive out lower-income residents. Our results highlight the role of foreign real estate capital flows in both stimulating the real economy and inducing gentrification in local economies.

Non-durable consumption and housing net worth in the Great Recession: Evidence from easily accessible data

In an influential paper, Mian, Rao, and Sufi (2013) exploit geographic variation to measure the effect of the fall in housing net worth on household expenditures during the Great Recession. Their widely-cited estimates are based on proprietary house price and proprietary expenditure data and therefore not easily replicable. We use alternative data on a subset of non-durable goods and on house prices, which are more easily accessible, to replicate their study. When estimating their same specification on our data, we obtain values for the elasticity of expenditures to the housing net worth shock that are virtually indistinguishable from theirs. However, our robustness analyses with respect to alternative model specifications yield more nuanced conclusions about the separate roles of house prices and initial housing exposure/leverage for the drop in expenditures. Moreover, the estimated elasticity is consistent, theoretically and quantitatively, with a simple calibrated model with wealth effects where leverage and credit constraints play no role.

The Persistent Employment Effects of the 2006-09 U.S. Housing Wealth Collapse

We show that the housing wealth collapse of 2006-09 had a persistent impact on employment across US counties. In particular, localities that had a larger loss in housing net-worth during that period had more depressed employment as late as 2016, without a commensurate population response. Using IV's and controls to identify the causal impact of the wealth shock amplify those results, leading to an estimate that a 10 percent change in housing net-worth between 2006 and 2009 causes a 4.5 percent decline in local employment by 2016, as compared to a 2006 baseline. We do not find long-term causal impact of the shock on wages. Sectoral results indicate, however, that the results are unlikely to be purely a result of persistently low demand, since, contrary to the short-run effects, the effect over the longer horizon is less concentrated in the non-tradables sectors and is instead more prominent in the high-skilled services sector.

The Recent Evolution of U.S. Local Labor Markets

Counties with severe declines in housing net worth during the 2007-09 recession experienced larger declines in employment.

Risky Mortgages, Bank Leverage and Credit Policy

Two key channels that allowed the 2007-2009 mortgage crisis to severely impact the real economy were: a housing net worth channel, as defined by Mian and Sufi (2014), which affected the wealth of leveraged households; and a bank net worth channel, which reduced the ability of financial intermediaries to provide credit. To capture these features of the Great Recession, I develop a DSGE model with balance-sheet constrained banks financing both risky mortgages and productive capital. Mortgages are provided to agents facing idiosyncratic housing depreciation risk, implying an endogenous default decision and a link between their borrowing capacity and house prices. The interaction among the housing net worth channel, the bank net worth channel and endogenous foreclosures generates novel amplification mechanisms. I analyze the quantitative implications of these new channels by considering two different shocks linked to the supply of mortgage credit: an increase in the va riance of housing risk and a deterioration in the collateral value of mortgages for bank funding. Both shocks are able to produce co-movements in house prices, business investment, consumption and output. Finally, I study two types of policy interventions that are able to reduce the severity of a mortgage crisis: debt relief for borrowing households and central bank credit intermediation.

The Rise and Fall of Consumption in the 2000s

The major portion of U.S. gross domestic product (GDP) is accounted for by consumer spending, which significantly affects the business cycle. Consumer demand has been extremely volatile since 2000, especially given the booms and busts in housing values and in mortgage lending. While it is well-established that housing net worth, credit availability, and household debt levels help to explain changes in consumer spending, the roles played by other potential determinants of consumption are not well identified or understood. This paper uses county-level data and a multiple-regression framework to explore how fluctuations in consumption between 2000 and 2012 are correlated with these macroeconomic variables: income, unemployment, debt, income inequality, consumer expectations, housing wealth, credit access, cash-out refinancings, and foreclosures. Four subperiods are considered: the dot-com recession (2001–2003), the subprime boom (2004–2006), the Great Recession (2007–2009), and the tepid recovery (2010–2012).

What Explains the 2007-2009 Drop in Employment?

We show that deterioration in household balance sheets, or the housing net worth channel, played a significant role in the sharp decline in U.S. employment between 2007 and 2009. Counties with a larger decline in housing net worth experience a larger decline in non-tradable employment. This result is not driven by industry-specific supply-side shocks, exposure to the construction sector, policy-induced business uncertainty, or contemporaneous credit supply tightening. We find little evidence of labor market adjustment in response to the housing net worth shock. There is no significant expansion of the tradable sector in counties with the largest decline in housing net worth. Further, there is little evidence of wage adjustment within or emigration out of the hardest hit counties.

Household Balance Sheets, Consumption, and the Economic Slump*

Abstract We investigate the consumption consequences of the 2006–9 housing collapse using the highly unequal geographic distribution of wealth losses across the United States. We estimate a large elasticity of consumption with respect to housing net worth of 0.6 to 0.8, which soundly rejects the hypothesis of full consumption risk-sharing. The average marginal propensity to consume (MPC) out of housing wealth is 5–7 cents with substantial heterogeneity across ZIP codes. ZIP codes with poorer and more levered households have a significantly higher MPC out of housing wealth. In line with the MPC result, ZIP codes experiencing larger wealth losses, particularly those with poorer and more levered households, experience a larger reduction in credit limits, refinancing likelihood, and credit scores. Our findings highlight the role of debt and the geographic distribution of wealth shocks in explaining the large and unequal decline in consumption from 2006 to 2009.

What Explains High Unemployment? The Aggregate Demand Channel

We show that deterioration in household balance sheets, what we refer to as the housing net worth channel, played a significant role in the sharp decline in U.S. employment between 2007 and 2009. Using geographical variation across U.S. counties, we show that counties with a larger decline in housing net worth experience a larger decline in non-tradable employment. This result is not driven by industry-specific supply-side shocks, exposure to the construction sector, policy-induced business uncertainty, or contemporaneous credit supply tightening. We find little evidence of labor market adjustment in response to the housing net worth shock. There is no expansion in the tradable sector in affected counties, and the correlation between the housing net worth decline and job losses in the tradable sector is zero. There is no evidence of wage adjustment, or of net labor emigration out of affected counties either.

Household Balance Sheets, Consumption, and the Economic Slump

We investigate the consumption consequences of the 2006 to 2009 housing collapse using the highly unequal geographic distribution of wealth losses across the United States. We estimate a large elasticity of consumption with respect to housing net worth of 0.6 to 0.8, which soundly rejects the hypothesis of full consumption risk-sharing. The average marginal propensity to consume (MPC) out of housing wealth is 5 to 7 cents with substantial heterogeneity across zip codes. Zip codes with poorer and more levered households have a significantly higher MPC out of housing wealth. In line with the MPC result, zip codes experiencing larger wealth losses, particularly those with poorer and more levered households, experience a larger reduction in credit limits, refinancing likelihood, and credit scores. Our findings highlight the role of debt and the geographic distribution of wealth shocks in explaining the large and unequal decline in consumption from 2006 to 2009.

Correcting Second Home Equity in HRS/AHEAD: The Issues, a Method, and Preliminary Results

Second home equity is an important component of both housing equity and net worth for the old population. It has been covered, implicitly or explicitly, across all waves of HRS and AHEAD surveys. But due to a skip-pattern error, not all households with second homes were asked detailed questions about current market value, amount of mortgage, etc... The negative impact of the inconsistent treatment of second home on the estimation of housing equity and net worth is substantial. When the second home information is not collected for all the households who own second homes (as in AHEAD 1995 and HRS 1996), the second home equity measure based on the partial data is likely to suffer from selection bias, rendering vulnerable both measures of total housing equity and total net worth. This paper reports on an imputation method to correct for this bias that we demonstrate and find effective.

Wealth: Determinants of Savings Net Worth and Housing Net Worth of Pre-Retired Households

The objectives of this study are to determine effects of household members' characteristics, financial resources, and attitude toward intergenerational support on change in savings net worth and change in housing net worth. Subsamples of White respondents, Black respondents, and Hispanic respondents were analyzed to identify the effects of race or ethnicity on the dependent variables. Attitude toward intergenerational support was the intervening variable. Change in labor income had a positive impact on change in savings net worth for all three racial or ethnic groups. An additional child in a household and an older age of the household head were likely to decrease the change in savings net worth. Effects of the remaining variables differed by subsample. The effects of labor and nonlabor income were different for the change in savings net worth but not for the change in housing net worth. Some different effects for variables across the three racial or ethnic groups were noted.