Friday, November 9, 2012: 9:45 AM-11:15 AM
Salon E (Radisson Plaza Lord Baltimore Hotel)
*Names in bold indicate Presenter
Organizers: Samuel Dastrup, Abt Associates
Moderators: Stephan Whitaker, Federal Reserve Bank of Cleveland and Rajeev Darolia, University of Missouri; University of Kentucky
Chairs: Vicki Been, New York University
Since housing prices began to decline in the first quarter of 2006, households across the country have lost over $7 trillion in home equity. As a result, CoreLogic estimates that 22 percent of homeowners with mortgages are now “underwater,” or have an outstanding mortgage balance that exceeds the value of their home. This collapse coincided with a spike in unemployment and a steep decline in the financial markets. Together, negative equity and weakened household budgets have led to an unprecedented surge in mortgage default, and have dramatically reduced the resources available to homeowners.
This panel examines the consequences of the housing market collapse for household decisions that are affected by changes in housing wealth and the accompanying financial strain. Three papers examine behavioral responses that have potentially enduring consequences. The first examines how struggling households manage credit, how housing debt interacts with other forms of debt, and how homeowners facing default and foreclosure prioritize which bills to pay and when. The second examines how housing wealth changes affect the probability of college enrollment and completion and the quality of college for students who enroll. The third examines how bequest and wealth transfers between generations have changed as a result of declines in housing wealth. These decisions are tied together by the fourth paper, which examines how homeowners’ perceptions of their housing values, which drive the decisions explored in the other papers, relate to the reality of market-based estimates.
Together, the papers on the panel inform key aspects of any policy response to the housing market boom and bust. Understanding the relationship between mortgages and other household credit alternatives is necessary to formulating a mortgage market that mitigates risks to borrowers and the broader financial market and economy. The relationship between housing wealth and human capital investments and intergenerational transfers motivates the need for a robust housing and mortgage market by pointing to examples of the fallout from the housing market boom and bust. These analyses also suggest a role for countercyclical education policy and the careful consideration of familial wealth building in policymaking. Finally, understanding how households realize and housing value fluctuations is a necessary first step in any policy response to anticipated behavioral responses to housing market movements.