Identifying Household Wealth Effects

University Of Wisconsin-Milwaukee, Milwaukee WI

Investigators

Abstract

This project uses a unique approach to measure the effects of changes in real estate values on household expenditures. For most homeowners, their house is their single largest financial asset. Economic theory predicts that changes in house values should result in changes in consumption; if the value of your house has increased, you are richer and presumably would consider an increase in spending. However, identifying the size of this effect is complicated. Both house values and household consumption are also affected by a number of other factors. For example, easy credit may increase both housing prices and consumption. The challenge is magnified because we have limited data on consumption at the level of individual households. This project uses a 'natural experiment' approach. The economists will look at housing prices in a residential area of Connecticut that was directly affected by an event that was not predicted. This is an exogenous shock to housing values. Using information on spending by individual households inside and outside of the affected area, the researchers hope to identify the structural component associated with changes in house prices. Better understanding of the relationship between house prices and household expenditures will allow investors and policymakers to better judge the future effects of housing market fluctuations on the macroeconomy. The goal is identification of the structural relationship between house price and household expenditures by combining a natural experiment with credit bureau data on credit card purchases. The data includes information on housing prices and housing characteristics on a parcel-by-parcel basis for all parcels located in four Connecticut towns: Newton, Monroe, Oxford, and Southbury.