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Too Poor to Retire? Housing Prices and Retirement

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  • Bo Zhao

    (Peking University)

Abstract

The near-retirement households among all working-age groups in the United States experienced larger drops in consumption and greater increases in labor force participation during the financial crisis of 2007-2009. Also, the retirement probability for near-retirement homeowners (but not for renters) decreases more in those areas where housing prices also decline more. This paper argues that the wealth effect of housing prices on retirement can account for those issues. It creates an incomplete-market life-cycle partial-equilibrium model with risky housing assets and endogenous retirement and verifies that the joint response of retirement and non-durable consumption implied by the structural model is consistent with the empirical findings using data from the Health and Retirement Study 1992-2012. It then shows that, after an unexpected 28 percent housing price decline, near-retirement homeowners ages 55-64 will reduce their non-durable consumption by 4.6 percent and increase their labor force participation by 1 percentage point immediately and delay their retirement by 2.8 months in the long run. The model also quantifies endogenous retirement as self-insurance for elderly homeowners against housing price risk. (Copyright: Elsevier)

Suggested Citation

  • Bo Zhao, 2018. "Too Poor to Retire? Housing Prices and Retirement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 27-47, January.
    • Handle: RePEc:red:issued:15-42
    DOI: 10.1016/j.red.2017.11.002
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    Cited by:

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    2. Francisco Perez‐Arce & María J. Prados, 2021. "The Decline In The U.S. Labor Force Participation Rate: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 35(2), pages 615-652, April.
    3. Borys Grochulski & Yuzhe Zhang, 2019. "Wealth Effects with Endogenous Retirement," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 173-200.
    4. Yang, Zhenbing & Chen, Zhuo & Shao, Shuai & Yang, Lili, 2022. "Can housing price regulation improve R&D performance in universities? Evidence from China," Socio-Economic Planning Sciences, Elsevier, vol. 82(PA).
    5. Yu, Zhixiu, 2024. "Why are older men working more? The role of social security," Journal of Public Economics, Elsevier, vol. 231(C).
    6. Rachel Ong & Gavin A Wood & Melek Cigdem, 2022. "Housing wealth, mortgages and Australians’ labour force participation in later life," Urban Studies, Urban Studies Journal Limited, vol. 59(4), pages 810-833, March.
    7. Tomasz Jedynak, 2022. "Does the Formulation of the Decision Problem Affect Retirement?—Framing Effect and Planned Retirement Age," IJERPH, MDPI, vol. 19(4), pages 1-30, February.
    8. Xun Bian & Zhenguo Lin & Feifei Zhu, 2024. "Housing leverage, home value, and retirement," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 52(4), pages 1103-1139, July.
    9. Lingxiao Zhao & Gregory Burge, 2021. "Retirement, Unretirement, and Housing Wealth during the Great Recession," The Journal of Real Estate Finance and Economics, Springer, vol. 62(3), pages 342-369, April.

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    More about this item

    Keywords

    Housing wealth effect; Endogenous retirement; Self-insurance;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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