Household Balance Sheets, Consumption, and the Economic Slump*

TLDR

The study investigates how the 2006–2009 housing collapse affected consumption by exploiting the highly uneven geographic distribution of wealth losses across the United States. It does so by using the geographic variation in housing wealth losses as a natural experiment to estimate consumption responses. The analysis finds a sizable consumption elasticity of 0.6–0.8 and an average marginal propensity to consume of 5–7 cents, with markedly higher MPCs in poorer, more levered ZIP codes, and shows that larger wealth losses in these areas coincide with greater reductions in credit limits, refinancing likelihood, and credit scores, thereby explaining the large, unequal decline in consumption during the slump.

Abstract

Abstract We investigate the consumption consequences of the 2006–9 housing collapse using the highly unequal geographic distribution of wealth losses across the United States. We estimate a large elasticity of consumption with respect to housing net worth of 0.6 to 0.8, which soundly rejects the hypothesis of full consumption risk-sharing. The average marginal propensity to consume (MPC) out of housing wealth is 5–7 cents with substantial heterogeneity across ZIP codes. ZIP codes with poorer and more levered households have a significantly higher MPC out of housing wealth. In line with the MPC result, ZIP codes experiencing larger wealth losses, particularly those with poorer and more levered households, experience a larger reduction in credit limits, refinancing likelihood, and credit scores. Our findings highlight the role of debt and the geographic distribution of wealth shocks in explaining the large and unequal decline in consumption from 2006 to 2009.