The Housing Bubble and Retirement Security

CRR Working Paper No. 2008-13

39 Pages Posted: 18 Mar 2009

See all articles by Alicia H. Munnell

Alicia H. Munnell

Boston College - Center for Retirement Research

Mauricio Soto

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2008

Abstract

House prices rose 60 percent between 2000 and 2007 before the housing bubble burst. The question is whether the housing boom made people better or worse prepared for retirement. Theory says that infinitely-lived households experience no increase in their real net worth when housing prices increase and would therefore have no reason to borrow against the increment in their home equity to increase their consumption. Two pieces of evidence suggest that they did tap their equity: the big increase in mortgage borrowing has accompanied the run-up in house prices, and a number of studies have reported a positive relationship between house prices and consumption. Using the 2004 Survey of Consumer Finances (SCF) this paper investigates the probability of households extracting home equity through an increase in housing-related debt, the probability that they use their housing-related borrowing for consumption, and finally the factors that determine the level of consumption spending out of their increased debt. The results show that while homeowners appear to take the present discounted value of future rents into account, many of them extracted equity and used it for consumption. A substantial proportion - perhaps 30 percent - of older households will be less secure in retirement because of the housing bubble.

Suggested Citation

Munnell, Alicia and Soto, Mauricio, The Housing Bubble and Retirement Security (August 2008). CRR Working Paper No. 2008-13. Available at SSRN: https://ssrn.com/abstract=1360878 or http://dx.doi.org/10.2139/ssrn.1360878

Alicia Munnell (Contact Author)

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States
617-552-1762 (Phone)

Mauricio Soto

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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