Consumption, wealth, and expected asset returns in the United States. Implications of housing wealth and housing consumption

Using US quarterly post-war data, this paper documents the existence of two common trends among non-housing non durable and housing consumption, financial and real estate wealth, and labour income (a proxy for human wealth). The first equilibrium relationship reflects the stationarity of the ratio of non-housing to housing consumption, while the second is associated to the long run stability of the consumption-wealth ratio. Consistently with a representative agent's budget constraint, the paper also shows that both trend deviations predict real total stock market returns over horizons ranging from 1 to 24 quarters: high non-housing relative to housing consumption anticipates declining returns, while high non-housing consumption relative to income and non-human wealth anticipates raising returns.