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

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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. The debt payment-to-income ratio of households in the lower tail of the income distribution is more sensitive to house price fluctuations.

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

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.

Homeownership Rate Source: U.S. Census Bureau

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.

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

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

Ratio of Monthly Debt Payments to Monthly Income Descriptive Statistics Survey Year1989199219951998200120042007 Max6.97399.1171.671093.8246.8043.65159.13 Min0.00 Median0.12 0.13 0.110.120.13 Mean0.180.450.300.600.210.220.37 Std. Dev.0.318.381.9419.661.121.024.24

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

Empirical Results, Part I Median regression first applied to: PIR i = β 1 + β 2 HousePrice i + δ 1 Y92 i + … + δ 6 Y07 i + γ 1 Q40 i + … + γ 5 Q100 i + β 3 Age i + β 4 Age i 2 + β 5 Age i 3 + β 6 HS i + β 7 College i + β 8 Homeowner i + β 9 Log(Income i ) + ε i Coefficient estimate for β 2 : 0.001 – Significant at 5% level

Empirical Results, Part II Next, the median regression is applied to: PIR i = β 1 + β 2 HousePrice i + δ 1 Y92 i + … + δ 6 Y07 i + γ 1 Q40 i + … + γ 5 Q100 i + ζ 1 HousePrice i Q40 i + … + ζ 5 HousePrice i Q100 i + β 3 Age i + β 4 Age i 2 + β 5 Age i 3 + β 6 HS i + β 7 College i + β 8 Homeowner i + β 9 Log(Income i ) + ε i

Relationship Between Payment-to-Income Ratio & House Prices… by Income Group Income Quantile Relevant Coefficient(s)Coefficient Estimate < 20% β 2 HousePrice i 0.815 20-39.9% β 2 HousePrice i + ζ 1 HousePrice i Q40 i 0.246 40-59.9% β 2 HousePrice i + ζ 2 HousePrice i Q60 i 0.121 60-79.9% β 2 HousePrice i + ζ 3 HousePrice i Q80 i 0.059 80-89.9% β 2 HousePrice i + ζ 4 HousePrice i Q90 i 0.035 90-100% β 2 HousePrice i + ζ 5 HousePrice i Q100 i 0.001

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.

Results Default Rates The literature on default rates suggests a positive relationship between a borrowers 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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