The housing wealth effect: The role of renovations and home improvements

This paper tests whether disregarding home improvements biases the housing wealth effect, that is, the marginal propensity to consume out of housing wealth. We decompose housing wealth changes in their unanticipated and exogenous component by filtering out previously elicited expectations of house prices and by dealing with endogenous home improvements. Results show that the bias is zero due to the zero correlation between home investments and changes in house values. Results are consistent with models with exogenous maintenance and with the evidence that maintenance contrasts depreciation and is mostly value-preserving. A comparative empirical approach excludes that results are only internally valid.