Consumption and Savings of First Time House Owners: How Do They Deal with Adverse Income Shocks?

João Ejarque and Søren Leth-Petersen
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João Ejarque: University of Essex

No 2008-08, CAM Working Papers from University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics

Abstract: We characterize savings behavior around the point of the first house purchase. Using a panel data set with income and wealth information on Danish first-time house owners we document that households save for the down payment, mortgage to the limit, run down liquid assets at purchase, and adjust to adverse income shocks occurring just after the purchase by reducing consumption. We build a model that replicates these observations, show that the preference parameters are identified from the data, and estimate them. Based on the estimated model house buying significantly reduces the ability to smooth adverse income shocks.

Pages: 23 pages
Date: 2008-11
New Economics Papers: this item is included in nep-mac and nep-ure
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