46 Pages Posted: 17 Dec 2015 Last revised: 16 Jun 2017
Date Written: March 2017
We evaluate the effect of house prices on U.S. military servicemember pension choices. In our setting the wealth channel – an increase in house prices increases household wealth and both current and future consumption – and the collateral channel – an increase in house prices enables the household to borrow more – have contrasting predictions about servicemember choices. Consistent with the collateral channel (and inconsistent with the wealth channel) servicemembers from states that experience house price increases are less likely to choose the pension option that provides immediate liquidity at the expense of long-term benefits. A one standard deviation increase in house prices translates into a change in the household's implied discount rate from 8% (the average borrowing rate against future pension in our sample) to 7.4%. The effects are only present when the cost of borrowing against the house is less than the cost of borrowing against future pension benefits, among servicemembers who do not live in military housing, who have lived in the same state for an extended period of time and whose demographics indicate them to be more credit constrained and more likely to own a house. Overall, our paper provides strong evidence consistent with the collateral channel.
Keywords: personal discount rate, time variation, macroeconomic variables, borrowing constraint, house price, collateral, housing, military pension
JEL Classification: D14, D91
Suggested Citation: Suggested Citation
Bennett, Benjamin and Gopalan, Radhakrishnan and Maurer, Thomas Andreas, The Collateral Value of Housing: Evidence from Servicemember Pension Choice (March 2017). Available at SSRN: https://ssrn.com/abstract=2704043 or http://dx.doi.org/10.2139/ssrn.2704043