Using data from the Panel Study of Income Dynamics, this paper examines how households’ home equity extraction during the previous decade affected their spending and saving behavior. The study makes use of recently released 2009 housing and wealth data as well as the extensive data on household expenditures and balance sheets that are available starting in 1999. The results show that during the height of the house-price boom (the 2003–2005 period) a one-dollar increase in equity extraction led to 14 cents higher household expenditures. Households also spent 21 cents of their extracted equity on home improvements and additions and saved roughly 19 cents of each dollar extracted through balance-sheet reshuffling. The spending, saving, and residential investment patterns are similar during the 2001-to-2003 and 2005-to-2007 periods. There is less evidence of households’ extracting equity to fund expenditures prior to 2001, except for health care and transportation-related expenses. Overall, the results are consistent with households’ extracting equity to fund necessary expenditures and desired investments.
JEL Classifications: E21
This paper, originally titled "Did Easy Credit Lead to Economic Peril? Home Equity Borrowing and Household Behavior in the Early 2000s," was substantially revised in March 2010.