Mortgage Amortization and Wealth Accumulation

Temptation and Commitment: A Model of Hand-to-Mouth Behavior

“…In the case of housing, our model is consistent with empirical evidence showing that homeownership plays an important role in household wealth accumulation (Di, Belsky, and Liu, 2007;Turner and Luea, 2009;LeBlanc and Schmidt, 2017;Kaas, Kocharkov, and Preugschat, 2019). Moreover, the view of illiquidity that we highlight is consistent with evidence that households have limited demand for mortgage flexibility (Vihriälä, 2019) and that mortgage amortization boosts overall wealth accumulation (Bernstein and Koudijs, 2020). These findings may have important implications for the regulation of financial products that give households greater access to credit (Kovacs and Moran, 2020).…”

“…Every additional dollar of housing wealth only reduces liquid assets by roughly 60 cents. This finding is consistent with recent empirical evidence from the Netherlands, showing that mandatory amortization results in increased wealth accumulation, as households accumulate more housing wealth due to this policy, but do not reduce their non-housing assets (Bernstein and Koudijs, 2020).…”

Temptation and Incentives to Wealth Accumulation

“…Every additional dollar of housing wealth only reduces liquid assets by roughly 60 cents. This finding is consistent with recent empirical evidence showing that mandatory amortization results in increased wealth accumulation, as households accumulate more housing wealth, but do not reduce their non-housing assets (Bernstein and Koudijs, 2020).…”

“…In addition, these results extend to the context of mortgage amortization payments, which in our framework also serves as a commitment device. Bernstein and Koudijs (2020) study the introduction of a mandatory amortization policy in the Netherlands and find that amortization payments result in a near one-for-one increase in net wealth accumulation, as households increase their housing wealth but do not reduce their liquid assets. In addition, Bäckman and Khorunzhina (2020) study the elimination of mandatory amortization in Denmark (the opposite of the policy in the Netherlands) and find that the elimination of mandatory amortization results in a large increase in consumption, which implies lower saving rates.…”

Dynastic Home Equity

“…Within the vast literature on intergenerational persistence, several papers have focused on the housing market, given its importance of housing for wealth-building (Piketty and Zucman (2014), Sodini, Van Nieuwerburgh, Vestman and von Lilienfeld-Toal (2016), and Bernstein and Koudijs (2020). Engelhardt and Mayer (1998) show that transfers to first-time homebuyers in the US lead to shorter time to save for down-payments, higher down-payments and more expensive houses.…”