Working Paper: CEPR ID: DP8097
Authors: Stefano Corradin; Reint Gropp; Harry Huizinga; Luc Leaven
Abstract: Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios towards home equity. Using US household data from the Survey of Income and Program Participation for the period 1996-2006, we find that especially households with low net worth maintain a larger share of their wealth as home equity if a larger homestead exemption applies. This home equity bias is also more pronounced if the household head is in poor health, increasing the chance of bankruptcy on account of unpaid medical bills. The bias is further stronger for households with mortgage finance, shorter house tenures, and younger household heads, which taken together reflect households that face more financial uncertainty.
Keywords: homestead exemptions; personal bankruptcy; portfolio allocation; home ownership
JEL Codes: G11; K35; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Low net worth households (G59) | Sensitivity to homestead exemption (G52) |
| Health status (I14) | Investment in home equity (G51) |
| Homestead exemption (Y60) | Home ownership rates (R21) |
| Homestead exemption (Y60) | Share of home equity in total wealth (G51) |
| Increase in homestead exemption (Y60) | Increase in home equity investment (G51) |