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The Housing Bubble and Retirement Security

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  • Alicia H. Munnell
  • Mauricio Soto

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. If they extracted the equity from their home through some form of housing-related debt and consumed all their borrowings, they will be left with additional debt and no additional assets and probably will be worse off in retirement. If they did not borrow and consume their equity, they will have more housing wealth to tap in retirement and will be better off. This brief explores how the rise in house prices affected individual households. The first section discusses the impact of an increase in house prices on the homeowner’s balance sheet and describes the evidence to date suggesting that the housing boom led to an increase in debt and to increased consumption. The second section uses the 2004 Survey of Consumer Finances (SCF) to explore the actual response of individual households. The third section discusses events since the 2004 SCF – the continued inflating of the housing bubble and its ultimate bursting in 2007. The final section concludes that a substantial proportion – perhaps a third – of older households will be less secure in retirement because of the housing bubble.

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Bibliographic Info

Paper provided by Center for Retirement Research in its series Issues in Brief with number ib2008-8-12.

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Length: 14 pages
Date of creation: Aug 2008
Date of revision: Aug 2008
Handle: RePEc:crr:issbrf:ib2008-8-12

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References

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  1. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, vol. 107(445), pages 1701-27, November.
  2. Alicia H. Munnell & Mauricio Soto, 2008. "The Housing Bubble and Retirement Security," Issues in Brief ib2008-8-12, Center for Retirement Research, revised Aug 2008.
  3. Alan Greenspan & James Kennedy, 2008. "Sources and uses of equity extracted from homes," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 120-144, spring.
  4. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jirka, 2006. "How large is the housing wealth effect? A new approach," CFS Working Paper Series 2006/35, Center for Financial Studies (CFS).
  5. Engelhardt, Gary V., 1996. "House prices and home owner saving behavior," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 313-336, June.
  6. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," Berkeley Program on Housing and Urban Policy, Working Paper Series qt28d3s92s, Berkeley Program on Housing and Urban Policy.
  7. Jonathan S. Skinner, 1996. "Is Housing Wealth a Sideshow?," NBER Chapters, in: Advances in the Economics of Aging, pages 241-272 National Bureau of Economic Research, Inc.
  8. John Y. Campbell & João F. Cocco, 2005. "How Do House Prices Affect Consumption? Evidence From Micro Data," NBER Working Papers 11534, National Bureau of Economic Research, Inc.
  9. Alicia H. Munnell & Mauricio Soto, 2006. "What Replacement Rates Do Households Actually Experience In Retirement?," Working Papers, Center for Retirement Research at Boston College wp2005-10, Center for Retirement Research.
  10. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 763-789, May.
  11. Donald Cox & Tullio Japelli, 1993. "The Effect Of Borrowing Constraints On Consumer Liabilities," Boston College Working Papers in Economics 228, Boston College Department of Economics.
  12. Sinai, Todd & Souleles, Nicholas S., 2007. "Net worth and housing equity in retirement," CFS Working Paper Series 2007/34, Center for Financial Studies (CFS).
  13. Munnell, Alicia H. & Geoffrey M. B. Tootell & Lynn E. Browne & James McEneaney, 1996. "Mortgage Lending in Boston: Interpreting HMDA Data," American Economic Review, American Economic Association, vol. 86(1), pages 25-53, March.
  14. repec:crr:issbrf:ib2006-43 is not listed on IDEAS
  15. Morris A. Davis & Michael G. Palumbo, 2001. "A primer on the economics and time series econometrics of wealth effects," Finance and Economics Discussion Series 2001-09, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Barry Bosworth & Rosanna Smart, 2009. "The Wealth of Older Americans and the Sub-Prime Debacle The Wealth of Older Americans and the Sub-Prime Debacle," Working Papers, Center for Retirement Research at Boston College wp2009-21, Center for Retirement Research, revised Nov 2009.
  2. Alicia H. Munnell & Mauricio Soto, 2008. "The Housing Bubble and Retirement Security," Working Papers, Center for Retirement Research at Boston College wp2008-13, Center for Retirement Research, revised Aug 2008.
  3. Dekkers, Gijs, 2008. "Are the old poor? A discussion and some cursory evidence," MPRA Paper 29436, University Library of Munich, Germany.

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