Download How Do Local Housing Market Cycles Affect Long

How Do Local Housing Market
Cycles Affect
Long-Term Wealth
Accumulation?
Joseph B Nichols
2008 NASM of the Econometric
Society
June 21, 2008
Note: The analysis and conclusions expressed herein are those of the author and do not
necessarily represent the views of the Board of Governors of the Federal Reserve System
and its staff.
Why?
• The role of housing wealth in explaining
consumption has been explored extensively in
recent years.
• This paper explores the same question from the
opposite direction.
– What is the role of housing wealth in explaining the
accumulation of financial wealth?
– How can we isolate the impact of housing wealth on
the accumulation of financial wealth?
Housing Wealth and Financial
Wealth
• Where does housing wealth go?
– Remain untapped in the home.
– Extracted to support consumption.
– Extracted to rebalance portfolio and increase
financial wealth.
– Use to fund an increase in housing
consumption by trading up or moving to an
area with higher home prices.
Endogeneity
• Housing wealth and financial wealth are highly correlated
with same set of household characteristics.
• In order to test for the impact of housing wealth on
financial wealth we need an instrument correlated with
housing wealth but not financial wealth.
• Housing market conditions at time of last transition from
rent to own.
– Is the decision to transition from rent-to-own independent from
state of local house price cycle?
– Assumption is that changes in family structure, i.e. household
formation or additional children, are a larger factor than market
timing.
How
• Use geographical variation in housing
markets.
• Is there a long-term negative effect on
financial wealth from buying your first
home at the top of the market?
• Is there a long-term positive effect on
financial wealth from owning a home
during a period of strong appreciation?
Data
• OFHEO state-level, quarterly, repeat-sale
house price indices, 1975-1999.
• PSID household files, 1975-1999.
• PSID wealth supplement, 1989, 1999.
Sample Selection
• Households who are homeowners in 1989
or 1999 and transitioned from rent to own
between 1975 and 1999.
• Exclude small number of outliers based on
inconsistent data between panels.
• Exclude observations with missing data.
– 1,752 observations 1999 sample.
– 2,021 observations 1989 sample.
Independent Variables
•
•
•
•
Log(Total Wealth)
Log(Housing Wealth)
Log(Financial Wealth)
Housing Wealth/Total Wealth
Dependent variables
• “Over-pay” for initial home
– Year-to-year percent change of state repeat-sales
index at time of last rent-own transition was more
than one standard deviation above the long-term
average for that state.
• “Under-pay” for initial home
– Year-to-year percent change of state repeat-sales
index at time of last rent-own transition was more
than one standard deviation below the long-term
average for that state.
• Annualized change in state repeat-sales index
over the last completed owner-occupied tenure
period.
Dependent Variables
• Number of moves between 1975 and 1989
or 1999.
• Age, Age2, Marital Status, Education
Level, and Race as of the 1989 or 1999
survey.
• Control for endogeneity by including
measures of permanent income.
– Log of average income, 1975-1999.
– Average rate of income growth, 1975-1999.
Base Model Results
• Demographic variables as expected
– Higher income, high changes in income, married, and older
households have more wealth.
• Number of moves reduces total wealth
– Reflects transaction costs – inability to find good job match
earlier on.
• Households who buy high have lower wealth, both
housing and financial.
• Change in local home prices not significant.
• Little success in explaining portfolio allocation.
• Results from 1989 sample consistent, if less robust.
Is Rent-Own Transition
Independent?
• Criticism : Households who buy their first
home at the top of the market have less
financial acumen, shorter time horizons,
and/or are more impatient than those who
buy at the bottom of the market.
• Such households would accumulate less
wealth throughout the life-cycle regardless
from the impact of local house price
cycles.
Response
• Regress measures of permanent income
on timing dummies.
– If criticism valid, those who buy high should
have lower permanent income as well as less
wealth.
• Choose alternative timing dummy.
– Household add child when local house prices
high/low.
Permanent Income Model Results
• None of the timing dummies are significant.
• Number of moves positive for change in income
and negative for level of income.
– Moves motivated to improve job match.
– Those with good early job match have high income
and no incentive to move.
• Change in home prices positive for high income.
– Areas with high income also have high earnings.
• Results from 1989 sample largely consistent.
– Buying low positive for level of income.
IV Model Results
• Wealth higher for households who have children
when prices low.
• Change in home prices negative.
– Similar to results in base model.
– Result of sample bias?
• Younger households who sell there home are forced to by
financial conditions.
• Results less clear for 1999 sample
– Although household who had child when prices low
hold more of portfolio in housing.
Conclusions
• Households who “over-pay” for their first home have
significantly less housing and financial wealth later in life.
• No significant results in explaining household portfolio
composition.
– Suggests households actively re-balance.
• Little evidence that decision to transition from rent-toown tied to higher human capital.
• Alternate results with IV support conclusion.
• Extensions
– Improve power of tests by using MSA rather than state house
price cycles.
– Examine effect of house prices and tenure changes on changes
in wealth between 1989 and 1999.