Get access

The Life-Cycle Effects of House Price Changes


  • We gratefully acknowledge the Pittsburgh Supercomputing Center (PSC) for providing computing resources. We thank Mitchell Berlin, Don Haurin, Victor Rios-Rull, Pierre-Daniel Sarte, Nancy Wallace, Neng Wang, Kei-Mu Yi, Harold Zhang, as well as seminar participants at Baruch College's Department of Finance and Economics, Federal Reserve Bank of New York, Ohio State University's Department of Economics, the University of California at Berkeley's Haas School of Business, the University of Pennsylvania's Wharton School of Business, the 2004 Society of Economic Dynamics Summer Meeting in Rome, the 2004 Bank of Canada Housing and the Macroeconomy Conference in Ottawa, the 2005 Federal Reserve Bank of Atlanta “Housing, Mortgage Finance, and the Macroeconomy” Conference in Atlanta, and the 2005 American Real Estate and Urban Economics (AREUEA) Annual Meeting in Philadelphia for their comments. We especially thank two anonymous referees whose suggestions and comments greatly improved the paper. The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia, or the Federal Reserve System.


We develop a life-cycle model that explicitly incorporates the dual feature of housing as both a consumption good and an investment asset. Our analysis indicates that the consumption and welfare consequences of house price changes on individual households vary significantly. In particular, the non-housing consumption of young and old homeowners is much more sensitive to house price changes than that of middle-aged homeowners. More importantly, while house price appreciation increases the net worth and consumption of all homeowners, it only improves the welfare of old homeowners. Renters and young homeowners are worse off due to higher lifetime housing consumption costs.