SBE-SES 0820337: Mian This project evaluates the impact of the housing boom on consumer borrowing, and consumption. The project develops a new empirical methodology that separates the causal impact of the change in house prices on household borrowing and consumption. The methodology explores zip code level variation in house prices while absorbing all possible economic shocks at the level of a county. It then uses variation in initial latent demand for credit to provide "supply-side induced" variation in house price growth that is plausibly exogenous to demand side changes at the zip code level. The project uses detailed consumer level data on home equity lines of credit, credit card debt, and auto loans to explore how existing home owners respond to the exogenous component of home price appreciation. It also estimates whether the borrowing response to home asset prices differs by a consumer's income, age and credit history. The project follows a long period of time from 1998 to 2008, and tests whether consumers use home price appreciation to substitute out of credit card debt. Finally, it estimates if borrowing against home price appreciation ultimately leads to higher default rates or not. The second part of the project estimates the real side impact of increase in home prices in terms of consumption. A major difficulty in doing so is measuring consumption at the local (county/zip) level. This project uses detailed establishment level data from census to construct proxies of consumption using retail sales at the local level. These consumption measures are then used to estimate the final impact of home prices and consumer borrowing on consumption and hence aggregate output. The project's results provide new insights into the causes of the "first major crisis of the 21st century", and also highlight the consequences of the housing boom and bust in terms of asset prices, leverage and consumption. The lessons learnt from our research are important for understanding the interplay between financial and real side of the economy. In particular, while many have often questioned the role that asset prices play in affecting consumer borrowing and consumption, empirically isolating the direction and magnitude of this channel has been difficult.
