House Prices and Consumption: A New Instrumental Variables Approach

We introduce a novel Bartik-like instrument for house prices con-sisting of the local composition of housing characteristics interacted with aggregate changes in the marginal prices of these character-istics. Using household-level panel data, we estimate elasticities of nondurable consumption expenditures with respect to house prices of around 0.1. These consumption effects are concentrated among the young and those most likely to be facing tight borrowing constraints. A decomposition shows that identifying variation in the instrument is associated with times and locations where house prices have varied the most: during the housing bust of the mid-2000s and in the west-ern United States. (JEL D12, E21, G51, R21, R31)