Noisy Housing Wealth Signals and Consumption

• In Event: Property Tax Assessments & House Prices

Abstract

A large macro-finance literature establishes that the marginal propensity to consume out of housing wealth is large. The literature assumes that households know the value of their homes and make consumption decisions based accordingly. This assumption may not be realistic because house prices are difficult to observe. Therefore, households may be relying on noisy signals of house prices to make consumption decisions. This paper uses property tax assessment as an example of such signal to investigate whether the full-information assumption holds.

First, we construct two home price indices, an assessed-value-based and a transaction-based home price index, then use a variety of statistical tests to compare their behavior. We document that annual changes in assessed values often disagree with, are less volatile than, and lag annual changes in transaction prices. We then use an instrumental variable identification strategy that exploits local mass reassessment events to show that, after controlling for changes in home value, property tax bill, and the household’s financial situation, households are more likely to take out a home equity line of credit (HELOC) when assessed values increase. The consumption response is as large as that of contemporaneous changes in home values. This result indicates that households rely on a highly imperfect signal of home value to make consumption decisions. A partial equilibrium calibration suggests that annual HELOC demand would have been approximately 1% higher after the Global Financial Crisis.

Author

• Natee Amornsiripanitch, Federal Reserve Bank of Philadelphia