An economic model predicts a large consumption response to changes in house prices.
Many economists used to think that changes in house prices had little effect on consumption, but data from the 2007–10 financial crisis and the slow recovery that followed are changing that view. Economic theory is now catching up to help explain the large link observed between plunging house prices and deep spending cutbacks.
Northwestern’s David Berger and Guido Lorenzoni and Chicago Booth’s Veronica Guerrieri and Joseph S. Vavra propose that consumption’s response to a change in house prices can be measured by looking at two variables: an individual’s marginal propensity to consume (MPC) as a result of temporary income changes (say, a salary bonus) and the value of her home. High-debt, low-net-worth individuals typically have a high MPC, so a negative shock to home prices, especially at the peak of the housing market, would have a large negative effect on their spending.
A study of demolitions in Chicago finds they raised housing costs, hurting renters.
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The growth of privately held businesses has some regulators and policy makers pondering whether to push for more financial transparency.
Is the US Economy ‘Going Dark’?Your Privacy
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