In a paper presented to a conference held by the Reserve Bank of Australia, Kohn and a Fed economist wrote that a "wealth effect" caused by rising home prices could boost consumption, leading in turn to an increase in household debt. Expenditures for more expensive homes are another factor behind an increase in debt, wrote Kohn and co-author Karen Dynan, chief of the household and real estate finance section of the Fed's Division of Research and Statistics.
In their paper, Kohn and Dynan noted that the personal savings rate in the U.S. has fallen from an average of 9.1% in the 1980s to an average of 1.7% so far this decade. In the same period, the ratio of total household debt to aggregate personal income has risen from 0.6 to 1.0.
Meanwhile, new financial products have reduced the cost and availability of housing finance, wrote Kohn and Dynan.
