Housing Wealth, Financial Wealth, and Consumption: New Evidence from Micro Data

Fluctuations in the stock market and in house values over the course of recent years have led to renewed economic policy debate as regards the effects of financial and housing wealth in thedetermination of household consumption patterns. This research assembles a unique matched sample of household data from the Survey of Consumer Finance and the Consumer Expenditure Survey to estimate the consumption effects of both financial and housing wealth. The micro-data permit numerous innovations in the assessment of wealth effects, including an analysis of the impact of wealth on both durable and non-durable consumption and a comparison of wealth effects as derive from gross versus after-debt measures of financial and housing wealth. Further,the research seeks to assess robustness of those estimates to deviations from trend and volatility in financial and housing wealth and among credit constrained and non-credit constrainedhouseholds. Overall, research findings indicate relatively large housing wealth effects. Among homeowners, the housing wealth elasticities are estimated in the range of .06 over the 1989 - 2001 period. Inmarked contrast, the estimated elasticities of consumption spending with respect to financial wealth are smaller in magnitude and are in the range of .02. Further, the estimated wealthelasticities appear robust to deviations from trend and volatility in the wealth measures. Research findings support the hypothesized behavioral distinction in household consumption spendingacross durable versus non-durable categories. Consumption propensities also diverge sharplyacross the credit constrained and non-credit constrained households. Finally, there is littledifference in wealth elasticities derived from measures of home equity versus house values. Overall, research findings indicate that financial and real estate wealth accounted for 1-1/2 and 12-1/4 percent, respectively, of the growth in personal consumption expenditures over the 2001:Q1 – 2005:Q3 period. Accordingly, the research points to the sustaining influence of housing wealth on U.S. economic activity during a period of financial market weakness and suggests sizable economy-wide risks as could arise from some moderate retrenchment in house values.