Associate Professor of Finance Lingxiao Li published research on the relationship between housing wealth and collateral and consumption. In recognition for the study, Li received a prestigious $10,000 industry award.

Li is the recipient of the 2021 Global Social Science Institute (GSSI) Best Paper award for her recent co-authored study, “Housing Wealth, Consumption Channels and Mortgage Liberalization,” published in the journal International Real Estate Review.

The recognition is bestowed upon outstanding academic theory and empirical analysis contributions to the fields of real estate, housing finance and urban economics.

“It is a pleasant surprise and an honor to receive this award. We are very grateful for the editorial board of GSSI and the journal for the recognition of our research and generosity. It greatly encourages us to keep up on our research and further improve it,” says Li, who shares the award with Bing Zhu of Technical University of Munich.

Defining and Divining the Housing Market

“Housing not only serves as a shelter but contributes to a significant part of the wealth portfolio for households,” explains Li. “We have observed households adjusting their consumption by borrowing against equity values in housing in real life. For instance, borrowers use home equity withdrawal to get cash to finance upgrades in property or other consumption. When house values appreciate, borrowers refinance with a larger loan amount to get some cash. For senior households, they could use reverse mortgages to receive money from the bank annually and improve their quality of life after retirement. Our findings are important to understand the channels between housing and consumption and how they motivate new instruments in the finance market.”

Since the mid-1990s, there has been a stronger relationship between the housing market and consumer consumption as homeowners leverage their home equity to spend. Li’s research delves further by incorporating homeowners’ use of home equity and easy mortgage availability into the long- and short-run relationships between consumption and wealth. But Li finds that it is the increased spending, not the increased home equity itself, that is associated with the collateral effect of homeowners borrowing against their homes’ values.

Easier lending standards help to prop up the housing market, even during hard times, such as during the COVID-19 pandemic, when stimuli and relief support kept the housing market red hot.

The limited literature on how housing impacts consumption motivated Li to undertake this research in keeping with her focus on the interaction of the housing market and economic decisions. Last year, Li co-authored a study on the impact of distant hurricanes on coastal housing markets farther afield as part of her broader research agenda on real estate.

In 2022, business leaders and policymakers are focused on the housing market as a potential bellwether for the economy. Despite a strong performance and run-up in prices during the COVID-19 pandemic, the housing market has recently cooled amid mortgage rate hikes and economic downturn worries.

Li speaks to the health of the local market: “For Southern California, demand is still strong. But buyers are willing to wait and become more patient to make an offer. Sellers still had the expectation to sell at high prices at the beginning of 2022. So, time on the market increases a lot for new listings. However, transaction prices are still high for new deals.

“As the stock market has not performed well in 2022, a lot of buyers withdrew from the housing market when their wealth shrunk. With the high inflation rate, changes in the stock market and housing values will impact households’ daily consumption and quality of life.”