Home Equity Withdrawal in Retirement

Abstract

The authors study empirically and theoretically the patterns of home equity withdrawal among retirees, using a model in which retirees are able to own or rent a home, save, and borrow against home equity, in the face of idiosyncratic risks concerning mortality, health, medical expenditures, and household size and observed house price changes. The estimated model is found to successfully replicate the patterns of homeownership and the saving/borrowing decisions of retirees. They use the estimated model for several counterfactual experiments. There are three main findings. First, the model predicts that a house price boom suppresses homeownership and increases borrowing, while a decline in house prices has the opposite effect. Second, the costs of home equity borrowing restrict the borrowing of retirees, and thus a reduction of such costs (e.g., lower costs of reverse mortgage loans) might significantly raise home equity borrowing. Third, there are two implications for the retirement saving puzzle. Although the cost of borrowing against equity in the house affects the borrowing of retirees, it does not affect total asset holding, implying that equity borrowing costs do not seem to offer a quantitatively significant contribution to resolving the retirement saving puzzle. On the other hand, the magnitude of the retirement saving puzzle might be exaggerated, because a sizable part of "retirement saving" is due to house price appreciation.

Keywords: Housing, Retirement, Mortgage, Financial development, Health, Life-cycle

JEL Classification: D91, J26, E21, G11