House Prices &
Household Debt
Laura Berlinghieri
UW – Eau Claire
Summary
• There is a positive and significant
relationship between the median debt
payment-to-income ratio and house
prices.
– This relationship differs across income groups.
• The debt payment-to-income ratio of households
in the lower tail of the income distribution is more
sensitive to house price fluctuations.
Aggregate Debt-to-Income Ratio
1.2
1
0.8
0.6
0.4
0.2
0
1965
1970
1975
1980
1985
1990
1995
2000
Total Household Debt/Personal Income
Household MortgageDebt/Personal Income
Other Household Debt/Personal Income
Sources: Federal Reserve; Bureau of Economic Analysis
2005
Household Debt and House Prices
• What are the possible relationships
between these variables?
1. As additional households gain access to
credit, the median debt-to-income ratio will
likely increase.
Homeownership Rate
70
69
68
Percentage
67
66
65
64
63
62
61
60
1965
1970
1975
1980
1985
1990
1995
Source: U.S. Census Bureau
2000
2005
Household Debt and House Prices
• What are the possible relationships
between these variables?
2. As house prices rise, credit-constrained
homeowners gain more access to credit.
• These homeowners are more likely to be in
the lower income groups.
Ratio of Debt Secured by Primary
Residence to Household Income
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1989
1992
1995
1998
2001
2004
2007
Income pct < 20
Income pct: 20-39.9
Income pct: 40-59.9
Income pct: 60-79.9
Income pct: 80-89.9
Income pct: 90-100
Source: Survey of Consumer Finances
Survey of Consumer Finances
• Triennial survey
– 1989 through 2007 waves
• Multiple imputation
• Dual-frame sample
– Oversamples the wealthy
• Subject to large outliers
– Use median regression
Ratio of Monthly Debt Payments to
Monthly Income
Descriptive Statistics
Survey Year
1989
1992
1995
1998
2001
2004
2007
Max
6.97
399.11 71.67 1093.82 46.80
43.65
159.13
Min
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Median
0.12
0.12
0.13
0.13
0.11
0.12
0.13
Mean
0.18
0.45
0.30
0.60
0.21
0.22
0.37
Std. Dev.
0.31
8.38
1.94
19.66
1.12
1.02
4.24
Median Monthly Payments Relative to
Monthly Income, All Households
0.25
0.20
0.15
0.10
0.05
0.00
1989
1992
1995
1998
2001
2004
2007
Income pct < 20
Income pct: 20-39.9
Income pct: 40-59.9
Income pct: 60-79.9
Income pct: 80-89.9
Income pct: 90-100
Source: Survey of Consumer Finances
Empirical Results, Part I
• Median regression first applied to:
PIRi = β1 + β2HousePricei + δ1Y92i + … + δ6Y07i
+ γ1Q40i + … + γ5Q100i + β3Agei + β4Agei2
+ β5Agei3 + β6HSi + β7Collegei
+ β8Homeowneri + β9Log(Incomei) + εi
• Coefficient estimate for β2: 0.001
– Significant at 5% level
Empirical Results, Part II
• Next, the median regression is applied to:
PIRi = β1 + β2HousePricei + δ1Y92i + … + δ6Y07i
+ γ1Q40i + … + γ5Q100i
+ ζ1HousePriceiQ40i + … + ζ5HousePriceiQ100i
+ β3Agei + β4Agei2 + β5Agei3 + β6HSi + β7Collegei
+ β8Homeowneri + β9Log(Incomei) + εi
Relationship Between Payment-to-Income
Ratio & House Prices… by Income Group
Income
Quantile
< 20%
Relevant Coefficient(s)
Coefficient Estimate
β2HousePricei
0.815
20-39.9%
β2HousePricei + ζ1HousePriceiQ40i
0.246
40-59.9%
β2HousePricei + ζ2HousePriceiQ60i
0.121
60-79.9%
β2HousePricei + ζ3HousePriceiQ80i
0.059
80-89.9%
β2HousePricei + ζ4HousePriceiQ90i
0.035
90-100%
β2HousePricei + ζ5HousePriceiQ100i
0.001
Summary of Empirical Results
• There is a positive and significant
relationship between the median debt
payment-to-income ratio and house
prices.
– This relationship differs across income groups.
• The debt payment-to-income ratio of households
in the lower tail of the income distribution is more
sensitive to house price fluctuations.
• Results are robust to the choice of
dependent variable.
Results  Default Rates
• The literature on default rates suggests a
positive relationship between a borrower’s
debt payment-to-income ratio and the
probability of default.
– As house prices increase, credit-constrained
households will likely respond by borrowing
more.
• Monthly debt payments relative to monthly income
will rise.
– Probability of default increases as a result.