The Impact of House Price Appreciation on Portfolio Composition and Savings
Recent federal policy initiatives have sought to aggressively boost homeownership in the United States. This is clear in the newly passed “American Dream Act” that provides downpayment assistance for low-income and first-time homebuyers. It is also clear in regulations calling for a significant increase in the percentage of Fannie Mae and Freddie Mac lending that must target underserved borrowers and communities. These efforts were prompted by concerns about unequal access to mortgage credit, the hope that homeownership will strengthen neighborhoods by encouraging families to invest in their communities, and the hope that homeownership will enhance the ability of individual families to accumulate wealth. An assumption that homeowners save, rather than consume wealth generated through housing capital gains is implicit. However, the Chairman of the Federal Reserve has attributed much of the strength in consumer spending during the recent recession to the propensity of homeowners to cash out and spend from their house price appreciation. This study evaluated the following two questions using data from the Survey of Consumer Finances from 1983 to 2001, and from the National Longitudinal Survey of Youth: To what extent do households save or consume in response to house price appreciation? How does house price appreciation affect household portfolios of assets and debts?