Did Easy Credit Lead to Overspending?
Home Equity Borrowing and Household
Behavior in the Early 2000s
Using data from the Panel Study of Income Dynamics, this paper examines how households’
home equity extraction during the previous decade affected their spending and saving
behavior. The study makes use of recently released 2009 housing and wealth data as well as
the extensive data on household expenditures and balance sheets that are available starting in
1999. The results show that during the height of the house-price boom (the 2003–2005 period)
a one-dollar increase in equity extraction led to 14 cents higher household expenditures.
Households also spent 21 cents of their extracted equity on home improvements and additions
and saved roughly 19 cents of each dollar extracted through balance-sheet reshuffling. The
spending, saving, and residential investment patterns are similar during the 2001-to-2003 and
2005-to-2007 periods. There is less evidence of households’ extracting equity to fund
expenditures prior to 2001, except for health care and transportation-related expenses. Overall,
the results are consistent with households’ extracting equity to fund necessary expenditures
and desired investments.
JEL Classifications: E21
Daniel Cooper is an economist in the research department of the Federal Reserve Bank of Boston. His e-mail
address is firstname.lastname@example.org.
This paper, which may be revised, is available on the web site of the Federal Reserve Bank of Boston at
A previous version of this paper with a slightly different title was part of my doctoral thesis at the University of
Michigan. I would like to thank Frank Stafford and Michael Palumbo for the valuable discussions that led to this
paper. I am also particularly indebted to Matthew Shapiro for all his guidance and support. Frank and Matthew
along with Bob Barsky, Dennis Capozza, S