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Between 1995 and
2007, inflation-adjusted house prices more than doubled in some areas of the
United States. During this unprecedented boom, households spent more and reduced
their saving rate.
A key question is how much
of the increased spending was related to rising house prices, as opposed to
other factors? And, if households spent more when prices soared, are they likely
to cut back during the housing bust? The answers can help in assessing retirement
saving trends.
This brief uses the Health
and Retirement Study to examine the spending behavior of older households during
the housing boom and subsequent bust. It compares changes in spending on non-durable
goods (e.g., meals out, vacations, and entertainment) of households in areas
with rapid growth in house prices to those in areas with relatively stable prices.
The results show that rising house prices led to a modest increase in annual
consumption that, if sustained over time, could eat up a significant portion
of the gain. Interestingly, the study also finds that households experiencing
a decline in house prices do not correspondingly reduce their consumption...
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