Working Paper: NBER ID: w8608
Authors: Steven F. Venti; David A. Wise
Abstract: Aside from Social Security and, for some, employer-provided pensions, housing equity is the principle asset of a large fraction of older Americans. Many retired persons have essentially no financial assets to support retirement consumption. We use data from the Health and Retirement Study (HRS), the Asset and Health Dynamics Among the Oldest Old (AHEAD), and the Survey of Income and Program Participation (SIPP) to understand the extent to which families use housing equity to support general consumption in retirement. The initial analysis is based on self-assessed home values reported by survey respondents. Because the self-assessments exaggerate actual home equity, much of the subsequent analysis is based on the selling price of recently sold homes, together with the reported equity in recently purchased homes. Homeowners can change home equity by either discontinuing ownership or by purchasing another home of lesser or greater value. We find that in the absence of a precipitating shock--death of a spouse or entry of a family member into a nursing home- -families are unlikely to discontinue home ownership. And even when there is a precipitating shock, discontinuing ownership is the exception rather than the rule. On average, families that move and purchase a new home tend to increase home equity. We find, however, that income-poor and house-rich families are more likely to reduce equity when they move, while house-poor and income-rich households are more likely to increase housing equity. Overall, accounting for discontinuing ownership and moving to another home, housing equity increases with age until about age 75 and then declines slightly as households grow older. The overall decline among older households (surveyed in the AHEAD) is about 1.76 percent per year, and this decline is largely accounted for by a 7.84 percent decline among households who experience a precipitating shock. Families that remain intact reduce housing equity very little, about 0.11 percent per year for two-person households and 1.15 percent per year for one- person households. We conclude that, on average, home equity is not liquidated to support general non-housing consumption needs as households age.
Keywords: Aging; Housing Equity; Retirement Consumption
JEL Codes: J14; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stability in family structure (J12) | retention of home equity (G51) |
| moving (J62) | increase in home equity (G51) |
| income-poor and house-rich families (G51) | reduce equity when they move (R21) |
| house-poor and income-rich households (R20) | increase equity when they move (J62) |
| age (J14) | home equity increases until age 75 (G51) |
| age > 75 (J14) | decline in home equity (G51) |
| significant life events (e.g., death of a spouse, entry into nursing care) (I12) | liquidation of home equity (G51) |
| home equity (G51) | not liquidated for general nonhousing consumption needs as households age (D14) |