The impact of diminished housing wealth on health in the United States: Evidence from the Great Recession

Highlights

• We examine the impact of the decline in housing wealth on psychological health.

• Psychological distress increases with a decline in housing wealth.

• Difficulties with mortgage increase psychological distress and depression.

• The increase in stress is the main cause of the adverse health outcomes.

Abstract

The sharp decline in home values in many industrialized and developing countries was one of the most evident facets of the global economic recession of 2008. Using data from the Panel Study of Income Dynamics (PSID) for 2007–2011, this study examines how the decline in housing wealth affected the psychological and physical health and health-related behaviors of 4007 U.S. households who were homeowners in 2007. We focus on two mechanisms that could account for how the drop in housing wealth affects health: increase in stress and negative changes in health-related behaviors. Controlling for the changes in non-housing wealth and employment status during the recession, the decline in housing wealth is associated with a small but statistically significant increase in psychological distress. Psychological health deteriorates more as the housing wealth relative to total wealth decreases. Finally, homeowners who have difficulties with mortgage payments report substantial increases in psychological distress and have higher rates of depression. These findings, combined with limited evidence of the change in health-related behaviors, suggest that the increase in stress is the main cause of the adverse health outcomes.

Introduction

Following the collapse of the housing bubble in 2007 in the United States, the international financial system experienced an unprecedented volatility leading to the global economic recession in many industrialized and developing countries (Bernanke, 2010, Mian et al., 2010, Mian et al., 2011). As house prices declined, many borrowers found it increasingly difficult to meet their mortgage payments and/or refinance their loans. Consequently, the global economic recession of 2008 reinforced the trend of sharp declines in home values, and resulted in a record high number of foreclosures and devaluation of housing-related securities (Mian and Sufi, 2010). From the first quarter of 2007 through the last quarter of 2010, house price indexes fell by 36 percent in the U.S., 16 percent in Spain, and 5–7 percent in Italy, Japan and Britain (The Economist, 2014). Also, 2.2 percent of all U.S. housing units (one in 45) received a foreclosure notice in 2009, more than 4 times the rate of foreclosure fillings in 2006 (RealtyTrac, 2009).

The goal of this study is to examine how the rapid decline in housing wealth during the global recession affected the psychological and physical health, and health-related behaviors of homeowners. We focus on housing wealth, which we define as the difference between the value of primary residence and outstanding mortgage, because it is an important component of household economic well-being. Moreover, households in a number of countries have experienced large decreases in housing wealth since the beginning of the recession. The value of owner-occupied homes accounts for 33 percent of household assets in the U.S. and an even higher percentage of household assets in European countries (Bricker et al., 2012a, Guiso et al., 2001, Christelis et al., 2013). The pre-recession data from the euro area indicates that the share of home value in households' net wealth increased from 59 percent in 1999 to 68 percent in 2007 (Eiglsperger and Haine, 2009). Housing wealth is particularly important for middle-class families since approximately two-thirds of median household wealth is invested in the primary residence (Bricker et al., 2012b, Christelis et al., 2013).

Our study aims to contribute to the literature on the relationship between socioeconomic status (SES) and health by examining the impact of unexpected large wealth losses on health. It also contributes to the growing literature that uses international data (U.S., U.K., Iceland, Greece, Australia, Spain, Portugal) to assess the effects of macroeconomic conditions and the recent financial crisis on physical and mental health (Ruhm, 2000, Ruhm, 2003, Ásgeirsdóttir et al., 2014, Karanikolos et al., 2013, Kentikelenis et al., 2011, Sargent-Cox et al., 2011, Katikireddi et al., 2012, Economou et al., 2013, Gili et al., 2013). Recessions could affect health in several different ways. First, the direct effect is generated by the loss of employment, income or wealth. Health could worsen due to the psychological stress of financial difficulties and tighter income constraints. At the same time, the reduced opportunity cost of time and the decrease in work-related stress could generate health benefits (e.g., more time for exercising or cooking). Second, macroeconomic effects could compromise health indirectly by reducing the generosity of private and public safety nets (e.g., public spending on health care). However, a slower economy could also improve health and reduce mortality due to reductions in environmental pollution or auto accidents.

Most recent studies focus on the direct effect of the recession by investigating the impact of unemployment or income loss on health (Bell and Blanchflower, 2011, Miller et al., 2009, Xu, 2013, Phillips and Nugent, 2014, Gili et al., 2013). Riumallo-Herl et al. (2014) show that job loss is associated with increased depressive symptoms in both the U.S. and Europe. In terms of the loss of wealth, McInerney et al. (2013) detect a limited impact of the stock market crash in October 2008 on health. Also relevant to our research, some previous studies examine the impact of the decline in housing prices or foreclosures on health. Currie and Tekin (2011) provide evidence of significant increases in unscheduled hospital and emergency room visits in areas most heavily affected by the foreclosure crisis in the U.S. They determine that the increase in hospital and emergency room visits is mostly caused by psychological stress, rather than the increase in unemployment or migration, decline in housing prices, or the switch from out-patient providers to hospitals. Lin et al. (2013) indicate that the declines in the county-level Housing Price Index in the U.S. are associated with higher rates of antidepressant utilization. Gili et al. (2013) show that the frequency of mental disorders in patients at the primary care centers in Spain increased significantly during the 2008 economic crisis, especially among those with mortgage payment difficulties.