DP7894 House Prices and Risk Sharing

Author(s): Dmytro Hryshko, Maria Jose Luengo-Prado, Bent E Sørensen
Publication Date: June 2010
Keyword(s): consumption smoothing, PSID, regional house prices
JEL(s): D12, E21
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7894

Using data from the Panel Study of Income Dynamics, we show that homeowners are able to maintain a high level of consumption following job loss (or disability) in periods of rising local house prices while the consumption drop for homeowners who lose their job in times of lower house prices is substantial. The results are consistent with homeowners being able to access wealth gains when housing appreciates as witnessed by their ability to smooth consumption more than renters. We calibrate and simulate a model of endogenous homeownership and consumption which is able to reproduce the patterns in the data quite well.