Housing Wealth and Consumption Expenditure

Abstract

This memo considers the effect of housing wealth fluctuations on consumption expenditures. While empirical evidence from macroeconomic, regional, and microeconomic data varies, on balance most of the evidence seems consistent with a medium-run (after 3 years or so) housing wealth MPC in the neighborhood of 5-10 cents. The paper presents its own methodology for estimating the housing MPC, and concludes that the immediate (next-quarter) MPC from a change in housing wealth is around 1.5 cents, with a final long-run effect of about 9 cents. Finally, the paper estimates that the growth in housing wealth since 2000q1 left the level of aggregate consumption about 2.2 percentage points higher by 2003q3 than it would have been if housing wealth had been flat over the intervening period, possibly providing a partial explanation for the surprising strength of spending in the wake of the stock market declines over the last few years. Paper prepared for Academic Consultants ’ meeting of the Board of Governors of