Financial Sophistication and Housing Leverage Among Older Households

35 Pages Posted: 17 Jan 2012 Last revised: 19 May 2015

See all articles by Hyrum L. Smith

Hyrum L. Smith

Utah Valley University

Michael S. Finke

The American College

Sandra J. Huston

Texas Tech University

Date Written: January 16, 2012

Abstract

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.

Suggested Citation

Smith, Hyrum L. and Finke, Michael S. and Huston, Sandra J., Financial Sophistication and Housing Leverage Among Older Households (January 16, 2012). Available at SSRN: https://ssrn.com/abstract=1986426 or http://dx.doi.org/10.2139/ssrn.1986426

Hyrum L. Smith

Utah Valley University ( email )

Orem, UT UT 84058
United States
801-863-8473 (Phone)

Michael S. Finke (Contact Author)

The American College ( email )

Bryn Mawr, PA 19010
United States

Sandra J. Huston

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

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