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House Prices & Household Debt

This study explores the significant relationship between median debt payment-to-income ratios and house prices, revealing how this relationship varies among different income groups. Notably, households in the lower income brackets show heightened sensitivity to fluctuations in house prices. As access to credit increases and house prices rise, these credit-constrained homeowners tend to borrow more, leading to higher monthly debt payments relative to their income and an increased probability of default. The findings underscore the complexities of household debt dynamics and their implications for housing markets.

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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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