| Mortgage financing options have become more diverse and creative. By December 2004, 34% of all mortgages were adjustable rate mortgages (ARMs) (Freddie Mac, 2005). Since June 2004, the Federal Reserve has increased the Federal Funds rate several times. It is now 2.5% higher than it was in June 2004, and subsequently, mortgage interest rates have been on the rise (FRED, 2005). As interest rates rise, housing costs rise, particularly for those homeowners with ARMs.; In light of the prevalence of ARMs and the likely continuing rise in interest rates, one important question is to what extent housing cost burdens impact non-housing consumption? In particular, how do households bear increasing housing costs? Do they adjust non-housing consumption as housing costs change, and, if so, to what extent do they alter this type of consumption?; This dissertation contains two essays in applied microeconomics that shed light on this question of how households respond to rising housing costs. The first essay examines housing cost burdens and the extent to which high housing cost burdens impact non-housing consumption. Using a four-year panel of household data, I investigate household's responsiveness to high housing cost burdens, while controlling for unobserved heterogeneity. The results indicate housing cost burdens affect the level of food expenditures, and, in particular, households with high housing cost burdens have lower expenditures on food than similarly situated households with low to moderate housing cost burdens.; The second essay examines housing and food consumption elasticities. My paper is novel in that it investigates gross and net substitution effects, uses alternative measures of food consumption, uses current micro-level data, and simulates the impact of an increase in housing costs due to rising interest rates on food consumption. The results indicate housing and total food consumption, as well as housing and excess food consumption, are net substitutes. The results of this study also suggest households adjust current food consumption when user costs rise, which is important in light of the fact that housing costs are on the rise due to increasing interest rates. |
