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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.

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house prices household debt

House Prices & Household Debt

Laura Berlinghieri

UW – Eau Claire

summary
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
Aggregate Debt-to-Income Ratio

Sources: Federal Reserve; Bureau of Economic Analysis

household debt and house prices
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
Homeownership Rate

Source: U.S. Census Bureau

household debt and house prices1
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
Ratio of Debt Secured by Primary Residence to Household Income

Source: Survey of Consumer Finances

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
median monthly payments relative to monthly income all households
Median Monthly Payments Relative to Monthly Income, All Households

Source: Survey of Consumer Finances

empirical results part i
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
empirical results part ii
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

summary of empirical results
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
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.