The Impact of Diminished Housing Wealth on Health: Evidence from the Great Recession

The 2007–2009 Great Recession significantly affected housing wealth, as median home value fell by roughly 12 percent. A rapid decrease in the value of primary residence and thus in the value of home equity has substantial effects on the financial well-being of homeowners and housing tenure decisions. The decline in home equity diminishes the likelihood of refinancing or a sale. If homeowners with positive equity are not affected by short-term liquidity constraints, default on a mortgage liability might not be an issue. Nevertheless, the financial well-being of the household could still be negatively affected by diminished housing wealth. Earlier studies have established a link between consumption and home prices, but the nature of this link is unclear. Households may adjust their lifetime plan regarding consumption and labor supply when they receive new information about their lifetime wealth. At the same time, a change in housing wealth may affect consumption by relaxing or tightening borrowing constraints.

A decline in housing wealth can also affect psychological and physical health in several ways. Diminished economic resources can cause changes in health-related behaviors that have negative consequences on health. For example, households experiencing a decline in wealth may attempt to reduce expenditures by not filling prescriptions, postponing doctor visits for preventive care, and switching less healthy but more affordable foods. An unexpected decline in wealth or an increase in the likelihood of mortgage default creates emotional distress. Stress is associated with anxiety, depression, sleeping and eating disorders, weight loss/gain, and also leads to health-undermining behaviors, such as smoking, and the abuse of alcohol and/or drugs. Finally, stress can induce other changes in behavior, such as social withdrawal, poor performance at work, and absenteeism.

We use data from the Panel Study of Income Dynamics (PSID) for 2007–2009 to investigate the effects of an unexpected wealth loss on psychological distress and physical health. Measuring the impact of wealth on health typically presents an empirical challenge because the causal relation might also run from health to wealth. There is ample evidence that the sudden shock to home values from 2007 to 2009 was not caused by U.S. households suddenly becoming ill. The extent of the loss in home value might be correlated with both observed (e.g., demographic variables) and unobserved (e.g., investment preferences and health endowments) characteristics. Besides controlling for observed demographic and socio-economic characteristics, we also control for unobserved time-invariant characteristics by using a fixed-effects estimation strategy.

We find that homeowners who experienced a decline in housing wealth between 2007 and 2009 report a significant increase in psychological distress and a significant deterioration in self-reported health status. Homeowners who experienced a decrease in housing wealth also suffer from stress that interferes with the course of their normal life activities. In addition, these households reported a greater number of days that they were unable to work or carry out normal activities because of stress. The behavioral consequences of stress are more significant among households headed by young and middle-aged individuals, and by African Americans.