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House Prices & Household Debt

House Prices & Household Debt. Laura Berlinghieri UW – Eau Claire. Summary. There is a positive and significant relationship between the median debt payment-to-income ratio and house prices. This relationship differs across income groups.

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House Prices & Household Debt

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  1. House Prices & Household Debt Laura Berlinghieri UW – Eau Claire

  2. Summary • There is a positive and significant relationship between the median debt payment-to-income ratio and house prices. • This relationship differs across income groups. • The debt payment-to-income ratio of households in the lower tail of the income distribution is more sensitive to house price fluctuations.

  3. Aggregate Debt-to-Income Ratio Sources: Federal Reserve; Bureau of Economic Analysis

  4. Household Debt and House Prices • What are the possible relationships between these variables? 1. As additional households gain access to credit, the median debt-to-income ratio will likely increase.

  5. Homeownership Rate Source: U.S. Census Bureau

  6. Household Debt and House Prices • What are the possible relationships between these variables? 2. As house prices rise, credit-constrained homeowners gain more access to credit. • These homeowners are more likely to be in the lower income groups.

  7. Ratio of Debt Secured by Primary Residence to Household Income Source: Survey of Consumer Finances

  8. Survey of Consumer Finances • Triennial survey • 1989 through 2007 waves • Multiple imputation • Dual-frame sample • Oversamples the wealthy • Subject to large outliers • Use median regression

  9. Ratio of Monthly Debt Payments to Monthly Income

  10. Median Monthly Payments Relative to Monthly Income, All Households Source: Survey of Consumer Finances

  11. Empirical Results, Part I • Median regression first applied to: PIRi= β1 + β2HousePricei + δ1Y92i + … + δ6Y07i + γ1Q40i + … + γ5Q100i + β3Agei + β4Agei2 + β5Agei3+ β6HSi + β7Collegei + β8Homeowneri+ β9Log(Incomei) + εi • Coefficient estimate for β2: 0.001 • Significant at 5% level

  12. Empirical Results, Part II • Next, the median regression is applied to: PIRi= β1 + β2HousePricei + δ1Y92i + … + δ6Y07i + γ1Q40i + … + γ5Q100i+ ζ1HousePriceiQ40i + … + ζ5HousePriceiQ100i+ β3Agei + β4Agei2 + β5Agei3+ β6HSi + β7Collegei+ β8Homeowneri + β9Log(Incomei) + εi

  13. Relationship Between Payment-to-Income Ratio & House Prices… by Income Group

  14. Summary of Empirical Results • There is a positive and significant relationship between the median debt payment-to-income ratio and house prices. • This relationship differs across income groups. • The debt payment-to-income ratio of households in the lower tail of the income distribution is more sensitive to house price fluctuations. • Results are robust to the choice of dependent variable.

  15. Results  Default Rates • The literature on default rates suggests a positive relationship between a borrower’s debt payment-to-income ratio and the probability of default. • As house prices increase, credit-constrained households will likely respond by borrowing more. • Monthly debt payments relative to monthly income will rise. • Probability of default increases as a result.

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