We re-examine the links between changes in housing wealth, financial wealth, and consumer spending. We extend a panel of U.S. states observed quarterly during the seventeen-year period, 1982 through 1999, to the thirty-seven year period, 1975 through 2012Q2. Using techniques reported previously, we impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regression models in levels, first differences and in error-correction form, relating per capita consumption to per capita income and wealth. We find a statistically significant and rather large effect of housing wealth upon household consumption. This effect is consistently larger than the effect of stock market wealth upon consumption.
In our earlier version of this paper we found that households increase their spending when house prices rise, but we found no significant decrease in consumption when house prices fall. The results presented here with the extended data now show that declines in house prices stimulate large and significant decreases in household spending.
The elasticities implied by this work are large. An increase in real housing wealth comparable to the rise between 2001 and 2005 would, over the four years, push up household spending by a total of about 4.3%. A decrease in real housing wealth comparable to the crash which took place between 2005 and 2009 would lead to a drop of about 3.5%.The authors conclude:
The numerical results vary somewhat with different econometric specifications, and so any numerical conclusion must be tentative. We find at best weak evidence of a link between stock market wealth and consumption. In contrast, we do find strong evidence that variations in housing market wealth have important effects upon consumption. This evidence arises consistently using thirty-one year panels of U.S. states, and this finding is robust to differences in model specification.And to have a better idea of what they are talking about:
As for the magnitude of the effects, consider a few of the most recent changes in housing wealth. The decline in housing wealth from 2005-2009 was roughly thirty percent (somewhat more in real terms). Estimates of the elasticity of consumer spending range from 0.03 to 0.18, but those that are estimated with separate coefficients for up markets and down markets are consistently about 0.10 in down markets. That figure implies that a decline of thirty-five percent in housing wealth would lower consumer spending by 3.5 percent. Consumption is about $10 trillion, and that, in turn, implies a decline in consumption of about $350 billion annually. To put those figures into context, consider the effects of the decline in housing production from 2.3 million units to 600 thousand, at $150,000 each. This implies reduced spending on residential capital of about $255 billion. Either has a large impact on the economy; together they have a very large impact.The paper, "Wealth Effects Revisited 1975-2012", is here.