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Home Equity Withdrawal in Retirement

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  • Irina Telyukova

    (University of California San Diego)

  • Makoto Nakajima

    (Federal Reserve Bank of Philadelphia)

Abstract

We study empirically and theoretically the patterns of home equity withdrawal among retirees, using a model where 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 replicate successfully the patterns of home ownership and saving/borrowing decisions of retirees. We use the estimated model for several counterfactual experiments. There are three main findings. First, the model predicts that a house price boom suppresses home ownership and increases borrowing, while a future decline in house prices would have the opposite effect. Second, costs of home equity borrowing are restricting the borrowing of retirees, and thus 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 home equity borrowing affects the borrowing of retirees, it does not affect the 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, as a sizable part of "retirement saving" is due to house price appreciation.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 636.

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Date of creation: 2010
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Handle: RePEc:red:sed010:636

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  5. Yoshiro Miwa & Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2004. "Accounting for Changes in the Homeownership Rate," CIRJE F-Series CIRJE-F-312, CIRJE, Faculty of Economics, University of Tokyo.
  6. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series WP-09-02, Federal Reserve Bank of Chicago.
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  9. Steven F. Venti & David A. Wise, 2001. "Aging and Housing Equity: Another Look," NBER Working Papers 8608, National Bureau of Economic Research, Inc.
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  13. Ortalo-Magné, François & Rady, Sven, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CEPR Discussion Papers 3015, C.E.P.R. Discussion Papers.
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  17. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
  18. David A. Wise, 2004. "Introduction to "Perspectives on the Economics of Aging"," NBER Chapters, in: Perspectives on the Economics of Aging, pages 1-16 National Bureau of Economic Research, Inc.
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Cited by:
  1. Makoto Nakajima, 2012. "Everything you always wanted to know about reverse mortgages but were afraid to ask," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 19-31.
  2. Yanbin Chen & Fangxing Li & Zhesheng Qiu, 2013. "Housing and Saving with Finance Imperfection," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 207-248, May.
  3. James Poterba & Steven Venti & David Wise, 2011. "The Composition and Drawdown of Wealth in Retirement," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 95-118, Fall.
  4. Pijoan-Mas, Josep & Ríos-Rull, José-Víctor, 2012. "Heterogeneity in Expected Longevities," CEPR Discussion Papers 9123, C.E.P.R. Discussion Papers.

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