Housing Over Time and Over the Life Cycle: A Structural Estimation

We estimate a structural model of optimal life-cycle housing and consumption in the presence of realistic labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consump- tion, and explicitly incorporates a house adjustment cost. Our estimation flts the cross- sectional and time-series household wealth and housing proflles from the Panel Study of Income Dynamics quite well, and suggests an intra-temporal elasticity of substitution be- tween housing and nonhousing consumption of 0.33 and a housing adjustment cost that amounts to about 15 percent of house value. Policy experiments with estimated prefer- ence parameters imply that households respond nonlinearly to house price changes with large house price declines leading to sizable decreases in both the aggregate homeown- ership rate and aggregate non-housing consumption. The average marginal propensity to consume out of housing wealth changes ranges from 0.4 percent to 6 percent. When lending conditions are tightened in the form of a higher down payment requirement, interestingly, large house price declines result in more severe drops in the aggregate homeownership rate but milder decreases in nonhousing consumption.