Aging and Housing Equity: Another Look

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.

Saver Heterogeneity and the Challenge of Assessing Retirement Saving Adequacy

“…Would we be comfortable borrowing against our home equity through a product such as a reverse annuity mortgage, or do we have a strong desire to leave our house to our children? Venti and Wise (2004) find that the rate at which elderly households move from the homes that they have lived in for decades is very low, which is consistent with these households being reluctant to draw on accumulated home equity.…”

Towards the end of bequest? The life cycle hypothesis sold to seniors

“…Nevertheless, as reverse mortgage markets do not come up so far to actuaries' great expectations, their supporters are intrigued by the patterns of asset decumulation in retirement: "One intriguing finding, says one, is that seniors typically do not draw down their housing equity wealth to support general non-housing consumption needs" (Stucki, 2004, p.8). Instead, home ownership continues to be high in old age, while home equity does not appear to fall with age either, as Venti and Wise (2001) confirmed after having taken a second look at their own results. From 1989 to 1999, home equity among American seniors had risen by almost 7% over the last decades whereas the amount of debt they carried on the home declined by 10%.…”

Quantitative Macroeconomics with Heterogeneous Households

“…At the same time, like any other asset, housing wealth is also a vehicle for self-insurance. Venti and Wise (2001) find that older home owners sometimes reduce home equity in response to shocks to family status, like entry to a nursing home or the death of a spouse.…”