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MAKING THE HOUSE A HOME: THE STIMULATIVE EFFECT OF HOME PURCHASES ON CONSUMPTION AND INVESTMENT

Abstract:

We introduce and quantify a new channel through which the housing market affects household

spending: the home purchase channel. Using an event-study design with data from the Consumer

Expenditure Survey, we show that households spend on average $3,700 more in the months

before and the first year following a home purchase. This spending is concentrated in the home related

durables and home improvements sectors, which are complementary to the purchase of

the house. Expenditures on nondurables and durables unrelated to the home remain unchanged or

decrease modestly. We estimate that the home purchase channel played a substantial role in the

Great Recession, accounting for one-third of the decline in home-related durables spending and a

fifth of the decline in home maintenance and investment spending from 2005 to 2010, together

totaling $14.3 billion annually