1 — U.S. BUREAU OF LABOR STATISTICS • bls.gov

Taylor J. Wilson

Economist – Bureau of Labor Statistics

Consumer Expenditure Survey Division

Eastern Economic Association

26 February 2016

Mortgage Debt and Consumption
HOW DOES MORTGAGE DEBT INFLUENCE CONSUMER BUDGETING 

CONSIDERATIONS?
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What is the Consumer Budget?

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 Consumer Budgets 

Mortgage Payments 

Other Debt Payments

Other Expenditures

Taxes

Savings

Unreported Expenditures
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Consumer Budgets

 As a proportion of income, consumer allocations can be distributed 

into three categories: luxury expenditures, necessity expenditures, 

mortgage payments.

 An assumption – Any income which does not fall into these categories 

is represented by the income-expenditure gap.

What is necessity and luxury? Income Elasticity (ξ ):

ξ < 1 ξ > 1
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Consumer Choice Theory

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Income 

Effect

Price Effect
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Mortgage Debt

 Properties of Mortgages:

Associate with a payment

Interest and Principal

Contract based expenditure

Necessity for subgroup

Luxury for whole sample

 Mathematically expressed as:

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M = P 

k=1

n

1

1 + i

k
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Price Effect of Housing

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Income

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Savings

 What is savings in the context of CE data? How can we talk 

intelligently about savings?

Income after taxes less expenditures

Income before taxes less expenditures

Carefully define what we mean by savings

 What is it we want to know?

What proportion of income is not going to a recorded expenditure?

– State Taxes

– Actual savings

– Do we include any actual expenditures in this category for the purpose of the 

analysis?

• Pensions

• Social Security

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Directionality of Savings

 According to the IRS, the 

average effective tax rate of 

incomes in sample is 

between 15-20 percent, on 

average and depending on 

the year.

 Our pool of ‘non-

expenditure related 

income’ less the effective 

tax rate for the average 

income in the cohort gives 

some idea of how this pool 

is changing over time.

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Elasticity Graphically

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Nominal Changes

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Case Year: 2008

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Year Luxury Necessity Mortgage Income

2007 13325.57 26661.91 13640.33 92491.01

2008 12852.98 27291.41 13950.20 92902.10

Δ(07-08) (472.59) 629.50 309.87 411.09

• First year where income stagnation is observed.

• Stagnating nominal incomes (decreasing real) 

correlate with a immediate decline in luxury 

consumption.

• Spending reallocation away from luxury goods to 

afford necessities and mortgage payments.
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Case Year: 2010

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Year Luxury Necessity Mortgage Income

2009 12491.88 26142.54 13514.29 92040.70

2010 12233.38 26197.14 12643.48 92682.15

Δ(09-10) (258.50) 54.60 (870.81) 641.45

• Year when mortgage payments fell the most. This is mostly due 

to a collapse in housing prices. Real incomes fell in 2010.

• Dynan, Mian, and Pierce (2012) show that it takes consumers 

many years to recover to pre-crisis consumption patterns. 

• 2010 data seem to suggest that most “new money” was being 

allocated to non-captured expenditures. 
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Consumer Budgets and Mortgage Payments

 Given all this information, what 

can we say about Mortgage 

Payments?

Intuition is king. They behave like 

a necessity under ‘normal’ 

circumstances. That is when 

income is rising and prices are 

constant. 

Consumers value paying their 

mortgage more than they value 

consumption on luxury items. 

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Predictive Power of Mortgage Payments

 Can mortgage 

payments predict 

other consumption 

patterns?

 Regression 

Coefficients

 Large exogenous 

shocks

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Questions?

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