Another blow to the housing theory

The housing boom theory says that we became hysterical during the housing crash, the wealth effect. Here is a study on how much we used our houses for cash:

In this column, Federal Reserve Bank of Boston economist Daniel Cooper presents new evidence suggesting that the spending impact of equity extraction during the recent US housing boom was relatively small compared with the household balance sheet changes and residential investment. This finding contrasts with recent findings claiming that households consumed the vast majority of the money they extracted.

Within the paper:

My results suggest that equity extraction has a small consumption effect in the US. Unlike the Mian and Sufi or Disney and Gathergood papers, I use actual household spending data to track households’ equity extraction behaviour rather than inferring their consumption response to equity extraction based on other, non-spending results. In particular, a $1 increase in equity extraction between 2003 and 2007 led to a 10-cent to 20-cent increase in overall non-housing expenditures for homeowners who stayed in their original home. This effect was strongest in the two-year period between 2003 and 2005 that preceded the downturn in US house prices in late 2006. Equity extraction had a much smaller impact on household spending in late 1999 and early 2001.

Daniel Cooper did the work. My take away is that housing was treated more or less with care by the homeowner. Except in conditions where the homeowner was directly affected by an income shock, the home owner generally swapped debt, or simply upgrade the house with equity loans.

The whole housing theory has been debunked. House builders operated nominally, as did home owners. The only evidence we have of housing distortion was the run up in prices, but volumes were extremely low during the run up, and the price shock mainly came from inflation expectations.