Goldman Sachs, New York, NY September 27, 2013

1. Goldman Sachs, New York, NY September 27, 2013 Discussion of“The Effect of Interest Rates and Collateral Value Shocks on Household Spending: Evidence from Mortgage Refinancing”by Atif Mian and Amir Sufi Jonathan A. Parker

2. Amount of Housing Consumed More income or wealth shifts budget constraint out Slope is relative price Indifference Curve Budget constraint Amount of other goods and services consumed

3. What happens when the price of housing rises? Amount of Housing Consumed Key: homeowners can always keep spending the same because house price rise increases wealth But: cost of housing rises also, so tend to reduce housing demand and increase spending on other goods Indifference Curve Budget constraint Amount of other goods and services consumed

4. An increase in (only) house prices increases spending • A decrease in (only) interest rates increases spending (intertemporal substitution and relative price) But this is microeconomics . . . • In the US economy or in a local economy, house prices are not causes, they propagate deeper causes like increases in wealth/future income/ability to borrow What happens when the averageconsumer in a region demands more?

5. What happens when the average consumer in a region demands more if the housing supply is perfectly elastic? Amount of Housing Consumed Price of a new house is its construction cost, so budget constraint makes a parallel shift out Indifference Curve Amount of other goods and services consumed Increase in income causes consumption of housing and other goods rise without house price rise. Identifies and Engel curve

6. What happens when the average consumer in a region demands more if the housing supply is perfectly inelastic? Amount of Housing Consumed Quantity of housing fixed, so price of housing rises so demand for housing = supply of housing Amount of other goods and services consumed Price change causes increase in house prices and a large increase in consumption of other goods

7. Mian, Rao, Sufi (2013) shows that in the crash, consumption fell more where housing was less elastic and house prices fell more • Not an MPC out of housing wealth • Instead, confirms that changes in relative prices lead to substitution away from more expensive goods This (better) paper adds focus on low credit score households and direct evidence on mechanism • Suppose low credit score households are impatient and credit constrained and have access to mortgage lending up to some loan-to-value • Then house prices not only contribute to substitution to other consumption but also change the demand of low-credit households for all goods Prediction: in goods times, consumption largest where housing elasticity is lowest and low credit scores prevalent

8. In an inelastic area, when high credit score households demand more, house prices increase Amount of Housing Consumed And low credit score households can refinance and spend more on other goods => Additional kick to spending (only) in places with low elasticity of housing Increase in demand causes even greater increase in spending on other goods where low credit scores are prevalent

9. Identification assumption: driving force as I have described Identify: equilibrium co-movement or prices and quantities in response to income/future income/wealth changes

10. Questions: • What if the driving force is differences in credit easing for low and high credit score households? • Why is the effect of low credit score so negative in a zip code with an elastic housing supply? • Paper captures spending increases inclusive of local multipliers. Would the answers be quantitatively different at different levels of aggregation of shocks? • Would an idiosyncratic, exogenous house appreciation lead to an individual response different for a household than a zip code than a county than a country? • Surprising finding for automobiles spending • Spending is interest-rate sensitive and • automobiles are easy to borrow against because they are good collateral • Paper not clear on cross-section vs. time-series • Suggest splitting into two cross-sections: boom and bust • Bust may partly be about default!

11. Conclusion • Main predictions of theory confirmed: • when a boom increases the relative price of housing, the increase in consumption demand is larger in places where housing is more constrained as relative prices lead to substitution • and in these places, where there are more liquidity constrained households, there is an even larger increase as borrowing constraints are relaxed by increasing house prices • This in no way invalidates representative agent short-cuts and is consistent with New Keynesian models in which current booms feed back more strongly into current demand • designed to capture liquidity constraints and impatience • more complex NK models with collateral looking even better