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Did easy credit lead to economic peril?: home equity borrowing and household behavior in the early 2000s

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  • Daniel H. Cooper

Abstract

Using data from the Panel Study of Income Dynamics, this paper examines how households' home equity extraction during 2001-to-2003 and 2003-to-2005 affected their spending and saving behavior. The results show that a one-dollar increase in equity extraction led to ninety-five or ninety-eight cents higher consumption expenditures. Nearly all of this spending increase was reversed in the subsequent period. A fair amount of these expenditures went toward home improvements and repairs. In addition, households used home equity to help finance their purchases of used cars. Equity extraction also led to some household balance sheet reshuffling. In particular, households who extracted equity were somewhat more likely than other households to pay down their higher-cost credit card debt and to invest in other real estate and businesses. Overall, the results in this paper are consistent with households' extracting equity during the first half of this decade to fund one-time durable good consumption needs.

Suggested Citation

  • Daniel H. Cooper, 2009. "Did easy credit lead to economic peril?: home equity borrowing and household behavior in the early 2000s," Public Policy Discussion Paper 09-7, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbpp:09-7
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    File URL: http://www.bostonfed.org/economic/ppdp/2009/ppdp0907.htm
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    Cited by:

    1. Alina K. Bartscher & Moritz Kuhn & Moritz Schularick & Ulrike I. Steins, 2020. "Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016," Staff Reports 924, Federal Reserve Bank of New York.
    2. Sheng Guo, 2022. "What Did Homeowners Do with Home Equity Borrowing? Contemporaneous and Long‐Term Effects," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2445-2475, December.
    3. Madis Aben & Merike Kukk & Karsten Staehr, 2012. "Housing Equity Withdrawal and Consumption Dynamics in Estonia 2002-2011," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 4(1).
    4. Xiaoqing Zhou, 2018. "Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment," 2018 Meeting Papers 795, Society for Economic Dynamics.
    5. Xiaoqing Zhou, 2022. "Mortgage borrowing and the boom-bust cycle in consumption and residential investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 244-268, April.
    6. Michael LaCour-Little & Wei Yu & Libo Sun, 2014. "The Role of Home Equity Lending in the Recent Mortgage Crisis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(1), pages 153-189, March.
    7. Damar, H. Evren & Lange, Ian & McKennie, Caitlin & Moro, Mirko, 2020. "Banking deregulation and household consumption of durables," IWH Discussion Papers 18/2020, Halle Institute for Economic Research (IWH).
    8. Fabian Lindner, 2013. "The Housing Wealth Effect on Consumption Reconsidered," IMK Working Paper 115-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    9. Andreas Fuster & Paul S. Willen, 2010. "$1.25 Trillion is still real money : some facts about the effects of the Federal Reserve’s mortgage market investments," Public Policy Discussion Paper 10-4, Federal Reserve Bank of Boston.
    10. Neil Bhutta & Benjamin J. Keys, 2016. "Interest Rates and Equity Extraction during the Housing Boom," American Economic Review, American Economic Association, vol. 106(7), pages 1742-1774, July.
    11. Neil Bhutta, 2012. "Mortgage debt and household deleveraging: accounting for the decline in mortgage debt using consumer credit record data," Finance and Economics Discussion Series 2012-14, Board of Governors of the Federal Reserve System (U.S.).
    12. John Mondragon & Janice Eberly & Gene Amromin, 2017. "The Housing Crisis and the Rise in Student Loans," 2017 Meeting Papers 369, Society for Economic Dynamics.
    13. Xiaoqing Zhou, 2022. "Mortgage borrowing and the boom-bust cycle in consumption and residential investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 244-268, April.

    More about this item

    Keywords

    Home equity loans; Consumer behavior;

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