House Prices and Consumer Spending

David Berger, Veronica Guerrieri, Guido Lorenzoni, Joseph Vavra

NBER Working Paper No. 21667
Issued in October 2015
NBER Program(s):   CF   EFG   LS   ME   PE

Recent empirical work shows large consumption responses to house price movements. Can consumption theory explain these responses? We consider a variety of consumption models with uninsurable income risk and show that consumption responses to permanent house price shocks can be approximated by a simple "sufficient-statistic" formula: the marginal propensity to consume out of temporary income times the value of housing. Calibrated versions of the models generate house price effects that are both large and sensitive to the level of household debt in the economy. We apply our formula to micro data to provide new measures of house price effects.