House Prices and Consumption: A New Instrumental Variables Approach with Christos A. Makridis

Online Appendix

Forthcoming at American Economic Journal: Macroeconomics

Awarded the A. R. Bergstrom Prize in Econometrics in 2019

Fluctuations in house prices can generate large movements in household expenditure. However, empirical work exploring this relationship must deal with the endogeneity problems associated with using house prices as a regressor. A popular instrumental variables strategy exploits cross-sectional variation in house prices as predicted by the local housing supply elasticities of Saiz (2010). As an alternative, I introduce a Bartik instrument for house prices that consists of the interaction between the pre-existing local supply of housing characteristics and broad changes in the relative demand for those characteristics. I show that the instrument is a strong predictor of house price growth in both the cross-section and through time. I then use household panel data on non-durable expenditures to estimate the elasticity of consumption with respect to local house price growth. I report precise estimates in the range of 0.10 to 0.15, which correspond to marginal propensities to consume out of housing wealth of 1.2 to 1.8 cents in the dollar. These estimates are robust to controls for aggregate fluctuations, local business cycles, and local industry and demographic composition. In contrast, I show that the traditional housing supply elasticity instrument produces inconsistent estimates when confronted with these same controls. Thus, the Bartik instrument succeeds in generating plausibly exogenous variation in house prices when housing supply elasticity instruments may fail. When decomposing variation in the Bartik instrument, I find that the identified consumption response to house prices is largely driven by times and locations where house prices varied the most: during the 2008 recession and in the Western US.

Public Education Inequality and Intergenerational Mobility with Angela Zheng

Forthcoming at American Economic Journal: Macroeconomics

Recent work has shown that neighborhoods with better schools tend to have higher house prices. In this paper, we investigate how the link between house prices and school quality affects intergenerational mobility. We build a dynamic heterogeneous agent model where individuals can choose to live in different neighborhoods whose house prices are determined in equilibrium. School quality in each neighborhood comes from property tax revenue. Simulations from the calibrated model show that neighborhoods with worse schools have lower mobility and create poverty traps. We then evaluate policies that can improve mobility such as equal school funding and housing vouchers.

Age, Industry, and Unemployment Risk During a Pandemic Lockdown (2021), with Murat Ozbilgin

Journal of Economic Dynamics and Control 

Media: stuff.co.nz

This paper models the macroeconomic and distributional consequences of lockdown shocks during the COVID-19 pandemic. The model features heterogeneous life-cycle households, labor market search and matching frictions, and multiple industries of employment. We calibrate the model to data from New Zealand, where the health effects of the pandemic were especially mild. In this context, we model lockdowns as supply shocks, ignoring the demand shocks associated with health concerns about the virus. We then study the impact of a large-scale wage subsidy scheme implemented during the lockdown. The policy prevents job losses equivalent to 6.5% of steady state employment. Moreover, we find significant heterogeneity in its impact. The subsidy saves 17.2% of jobs for workers under the age of 30, but just 2.6% of jobs for those over 50. Nevertheless, our welfare analysis of fiscal alternatives shows that the young prefer increases in unemployment transfers as this enables greater consumption smoothing across employment states.


Work in Progress

Stuck at Home: Housing Demand During the COVID-19 Pandemic (with William Gamber and Anirudh Yadav)

Revise and Resubmit at Journal of Housing Economics

The COVID-19 pandemic induced a significant increase in both the amount of time that households spend at home and the share of expenditures allocated to at-home consumption. These changes coincided with a period of rapidly rising house prices. We interpret these facts as the result of stay-at-home shocks that increase demand for goods consumed at home as well as the homes that those goods are consumed in. We first test the hypothesis empirically using US cross-county panel data and instrumental variables regressions. We find that counties where households spent more time at home experienced faster increases in house prices. We then study various pandemic shocks using a heterogeneous agent model with general equilibrium in housing markets. Stay-at-home shocks explain around half of the increase in model house prices in 2020, with lower mortgage interest rates explaining around one third, and unemployment shocks and fiscal stimulus accounting for the remainder. We find that young households and first-time home buyers account for much of the increase in underlying housing demand during the pandemic, but they are largely crowded out of the housing market by the equilibrium rise in house prices.

House Prices, Investors, and Credit in the Great Housing Bust (Job Market Paper)

I study the role of investors in stabilizing housing markets during the Great Housing Bust. Using transaction-level housing data, I distinguish between two types of investors that were active during this period: large corporate investors and small household investors. I estimate that following a mortgage credit contraction, house prices fell by 30 percent more in markets where household investors absorbed larger shares of house purchases. To rationalize this result, I build a heterogeneous agent model of the housing market featuring both types of investors. I show that equilibrium house prices fall sharply following a mortgage credit contraction when household investors are required to absorb falling housing demand. In contrast to corporate investors, household investors are sensitive to changing credit conditions and the illiquidity of housing assets. Prices must fall to generate sufficiently large returns to compensate previously indebted homeowners for the increase in borrowing required to invest in additional housing.

Intergenerational Wealth Effects of House Price Changes (with Mike Gilraine and Angela Zheng)