House prices and risk sharing

Homeowners in the Panel Study of Income Dynamics 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. These 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. A calibrated model of endogenous homeownership and consumption is able to reproduce the patterns in the data quite well and provides an interpretation of the empirical results.

Research Highlights► Households’ ability to smooth consumption in the face of job displacement or disability is studied. ► The empirical focus is on deviations from countrywide fluctuations, or risk sharing. ► Regional house prices are used; renters compared to owners, and young households to old households. ► Homeowners maintain a higher (lower) consumption after job loss when local house prices increase (fall). ► A calibrated model reproduces some data patterns and is used to interpret the empirical results.