Anticipated House Purchases and Household Consumption

Abstract

This paper evaluates how anticipated purchases of housing affect households' consumption of non-durable goods. I build a non-linear, heterogeneous agent model in which households save in liquid assets and illiquid housing, where the latter can be used as collateral for borrowing. I show that it is able to replicate the empirical distributions of income and wealth within the US economy. In the model there is substantial heterogeneity in households' marginal propensities to consume. Households with a high probability of buying housing stock lower their consumption of non-durable goods in anticipation of being credit constrained after their purchase. This results in households with low, even negative, marginal propensities to consume. I verify the model's predictions using micro-data from the PSID to show that (i) consumption falls in anticipation of, and after, changes in the stock of housing and (ii) households who are planning on purchasing housing have negative marginal propensities to consume. Finally, I use this model to examine the general equilibrium effects of tax credits for first home buyers and show that they lead to decreases in aggregate consumption.

About the presenter’s visit

Dr Gross will be visiting the School of Economics on Tuesday 8^th October 2019.  While here he will be using room 520A Colin Clark Building.  If you would like to meet with him or have lunch or dinner with him please contact Dr Jorge Miranda Pinto who will be his host while at The University of Queensland.  Dr Miranda Pinto can be contacted on j.mirandapinto@uq.edu.au.