AREUEA January 2006 Conference

Paper Submission

Housing Costs, Non-Housing Consumption,

and Household Financial Well-Being

Heather M. Luea

Tracy M. Turner

April 2005

Please address all correspondence to:

Heather M. Luea

Kansas State University

Department of Economics

320 Waters Hall

Manhattan, Kansas 66506

Phone: 785-532-4583

Fax: 785-532-6919

Email:

JEL Classification:R20, R25, R31.

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Luea is Ph.D. student at Kansas State University. Turner is assistant professor, Department of Economics, Kansas State University. Luea gratefully acknowledges funding from the U.S. Department of Housing and Urban Development Early Doctoral Research Program.

Abstract

This paper examines housing affordability by income, tenure and length of residence, and the extent to which high housing cost burdens impact household consumption and financial well-being. In particular, we expect that households transitioning into homeownership and those experiencing negative income shocks may experience relatively high housing cost burdens. We are particularly interested in the way in which such households respond to increased housing cost burdens. Households may reduce non-housing consumption or maintain such consumption by reducing savings through tapping into home equity or other forms of saving, or increasing non-mortgage debt. Some households may weather temporary financial hardship by receiving transfers from parents or other family members.

Recent research suggests that the shortage of affordable housing units in the U.S. is growing (Daskal, 1998; Quigley and Raphael, 2004). Moreover, low income households are more likely to experience affordability problems in the early years of homeownership than high-income households (Turner, 2004). In light of the success of federal policy initiatives in boosting the homeownership rates of low-income and minority households (Bostic and Surette, 2001), understanding which households experience affordability problems and how these households respond is important for evaluating the success of homeownership initiatives.

While numerous studies have examined the relationship between housing wealth and consumption spending (for example, Skinner, 1993; Englhardt, 1996; Case, Quigley, and Shiller, 2001) and the dependency on bequests for financing home purchases (Haurin, Wachter and Hendershott, 1995; Mayer and Engelhardt, 1996; Deutsch, 1997), to our knowledge, no study to date has examined the implications of high housing costs burdens for non-housing consumption, wealth accumulation and receipt of transfers. We examine these issues using the Panel Study of Income Dynamics (PSID). Using variation across and within households over time, we provide a careful study of the housing cost burdens of both renters and homeowners by income and length-of-residence status. Further, we examine the extent to which high housing cost burdens impact consumption, net worth, and receipt of transfers using a multivariate econometric approach.

We examine households annually from 1990 to 1997 and bi-annually from 1999 to 2003 to generate housing cost profiles by income, tenure and residence length status. In addition, we provide descriptive analysis of the households experiencing housing affordability problems. We then undertake econometric analysis using the 1999, 2001, and 2003 PSID data. We limit ourselves for the most recent years of the PSID to undertake the econometric analysis because it is during these years that expanded non-housing consumption variables are available. Specifically, in addition to expenditures on unprepared food, delivered food and restaurant meals, the later years include data on cable expenses and phone expenses.

Research indicates that food expenditure is a reasonable proxy for consumption spending (Skinner, 1989;Flavin and Nakagawa, 2004), and it has been used in studies that investigate the relationship between house value and non-housing consumption (Skinner, 1989; Flavin and Nakagawa, 2004; Martin, 2003). However, we expect that cable and phone services expenditures may be particularly sensitive to high housing costs burdens. Wealth data is collected by the PSID every five years and includes data on income transfers and net worth, which we use to impute biannual data for the years 1999, 2001 and 2003. While other datasets such as the Consumer Expenditure Survey or the Survey of Consumer Finances may provide more expenditure or wealth information, or a larger sample size than the PSID, only the PSID is longitudinal, allowing us to follow households over time and control for unobserved heterogeneity. We model non-housing consumption, net wealth, and transfers as endogenous and functions of housing affordability as well as other demographic and economic variables.

References

Bostic, Raphael and Brian Surette. “Have the Doors Opened Wider? Trends in Homeownership Rates by Race and Income.” Journal of Real Estate Finance and Economics, 23(3), November 2001, 411-434.

Case, Karl E., John M. Quigley, and Robert J. Shiller (2001). "Comparing Wealth Effects: The Stock Market versus the Housing Market." Working Paper. National Bureau of Economic Research.

Cox, Donald (1990). "Intergenerational Transfers and Liquidity Constraints." The Quarterly Journal of Economics, 105(1), 187-217.

Cox, Donald and Tullio Japelli (1990). "Credit Rationing and Private Transfers: Evidence from Survey Data." The Review of Economics and Statistics, 72(3), 445-454.

Daskal, Jennifer (1998). "In Search of Shelter: The Growing Shortage of Affordable Rental Housing." Center on Budget and Policy Priorities.

Deutsch, Edwin (1997). "Indicators of Housing Finance Intergenerational Wealth Transfers." Real Estate Economics, 25(1), 129-172.

Engelhardt, Gary V. (1996). "House Prices and Home Owner Saving Behavior." Working Paper. National Bureau of Economic Research.

Flavin, Marjorie and Shinobu Nakagawa (2004). "A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence." Working Paper. National Bureau of Economic Research.

Hancock, K.E. (1993). "Can Pay? Won't Pay?' or Economic Principles of 'Affordability.'" Urban Studies, 30(1), 127-145.

Haurin, Donald R., Susan M. Wachter, and Patric H. Hendershott (1995). "Wealth Accumulation and Housing Choices of Young Households: An Exploratory Investigation." Working Paper. National Bureau of Economic Research.

MacDonald, Maurice and Sun-Kang Koh (2003). "Consistent Motives for Inter-Family Transfers: Simple Altruism." Journal of Family and Economic Issues, 24(1).

Martin, Robert F. (2003). "Consumption, Durable Goods, and Transaction Costs." Board of Governors of the Federal Reserve System, Discussion paper no. 756.

Mayer, Christopher J. and Gary V. Engelhardt (1996). "Gifts, Down Payments, and Housing Affordability." Journal of Housing Research, 7(1).

Quigley, John M. and Steven Raphael (2004). "Is Housing Unaffordable? Why Isn't It More Affordable?" Journal of Economic Perspectives, 18(1), 191-214.

Skinner, Jonathan (1989). Housing Wealth and Aggregate Saving.” Working Paper. National Bureau of Economic Research.

Skinner, Jonathan (1993). "Is Housing Wealth a Sideshow?" Working Paper. National Bureau of Economic Research.

Turner, Tracy M. (2004). "Homeownership and the Wealth Accumulation of Low- and Moderate-Income Households." Kansas State University.

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