Comparing Wealth Effects: The Stock Market versus the Housing Market - By Karl E. Case, John M. Quigley, and Robert J. Shiller (2005)

Conclusion

The importance of housing market wealth and financial wealth in affecting consumption is an empirical matter. We have examined this wealth effect with two panels of cross-sectional time-series data that are more comprehensive than any applied before and with a number of different econometric specifications.

The numerical results vary somewhat with different econometric specifications, and so any numerical conclusion must be tentative. We find at best weak evidence of a stock market wealth effect. However, we do find strong evidence that variations in housing market wealth have important effects upon consumption. This evidence arises consistently using panels of U.S. states and industrial countries and is robust to differences in model specification.

For example, according to the results presented in Table 2 for Model I, a ten percent increase in housing wealth increases consumption by roughly 1.1 percent for the international panel, while a ten percent increase in stock market wealth has virtually no effect upon consumption. For the panel of U.S. states in Table 2 (Model I), a ten percent increase in housing wealth and in stock market wealth have about the same effect on consumption – an increase of 0.4 percent. According to the ECM model, Table 4 (Model I), the immediate effect of a ten percent increase in housing wealth is an increase in consumption of one percent for the panel of Western countries, while a ten percent increase in financial wealth has a negligible effect. According to the same model, the immediate effect of a ten percent increase in housing wealth is an increase in consumption of 0.4 percent for the panel of U.S. states while a ten percent increase in financial wealth has no effect. (Actually, the point estimate is negative.) Absent a second shock, the effect of a ten percent increase in housing wealth is reduced to 0.3 percent after four quarters and to 0.2 percent after ten quarters.

These calculations should not imply a false precision in the interpretation of our econometric models. Nevertheless, they do support the conclusion that changes in housing prices should be considered to have a larger and more important impact than changes in stock market prices in influencing household consumption in the U.S. and in other developed countries.