New England Public Policy Center Working Paper No. 09-3
by Dmytro Hryshko, University of Alberta, María José Luengo-Prado Northeastern University and NEPPC Visiting Scholar, Bent E. Sørensen , University of Houston and CEPR

We show that homeowners are able to maintain a high level of consumption following job loss or disability in periods of rising house values. However, the consumption drop for consumers who simultaneously lose their job and equity in their houses is substantial. Using data from the Panel Study of Income Dynamics, we verify that homeowners smooth consumption more than renters, and that consumption smoothing improves when houses appreciate in the area of residence. We calibrate and simulate a model of endogenous homeownership and home-equity loans, and show that the model is able to reproduce the patterns in the data quite well.

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