Financial Sophistication and Housing Leverage Among Older Households
Hyrum L. Smith
Virginia Tech - Department of Agricultural and Applied Economics
Michael S. Finke
Texas Tech University; University of Missouri at Columbia - Department of Finance
Sandra J. Huston
Texas Tech University
January 16, 2012
Increasing mortgage debt among older households has been cited as evidence of financial distress caused by low financial knowledge, poor lending practices, and increased appetites for debt. This paper investigates whether housing leverage among older households is related to financial sophistication, tax effects, and a desire to increase portfolio allocation to risky assets. Results indicate a time trend in low housing leverage, but no trend in high housing leverage. While housing leverage increases with liquidity constraints, it also increases with financial sophistication, and tax and portfolio incentives are strongly related to high housing leverage. The incentive to borrow against home value created by the deductibility of mortgage interest appears to encourage greater housing leverage and vulnerability to housing price shocks.
Number of Pages in PDF File: 35working papers series
Date posted: January 17, 2012 ; Last revised: January 18, 2012
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