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The Housing Bubble and Retirement Security

Listed author(s):
  • Alicia H. Munnell
  • Mauricio Soto

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. Theory says that infinitely-lived households experience no increase in their real net worth when housing prices increase and would therefore have no reason to borrow against the increment in their home equity to increase their consumption. Two pieces of evidence suggest that they did tap their equity: the big increase in mortgage borrowing has accompanied the run-up in house prices, and a number of studies have reported a positive relationship between house prices and consumption. Using the 2004 Survey of Consumer Finances (SCF) this paper investigates the probability of households extracting home equity through an increase in housing-related debt, the probability that they use their housing-related borrowing for consumption, and finally the factors that determine the level of consumption spending out of their increased debt. The results show that while homeowners appear to take the present discounted value of future rents into account, many of them extracted equity and used it for consumption. A substantial proportion – perhaps 30 percent – of older households will be less secure in retirement because of the housing bubble.

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File URL: http://crr.bc.edu/working-papers/the-housing-bubble-and-retirement-security-2/
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Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2008-13.

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Length: 39 pages
Date of creation: Jul 2008
Date of revision: Aug 2008
Handle: RePEc:crr:crrwps:wp2008-13
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  1. Cox, Donald & Jappelli, Tullio, 1993. "The Effect of Borrowing Constraints on Consumer Liabilities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 197-213, May.
  2. Alan Greenspan & James E. Kennedy, 2007. "Sources and uses of equity extracted from homes," Finance and Economics Discussion Series 2007-20, Board of Governors of the Federal Reserve System (U.S.).
  3. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," Economics Working Paper Archive 535, The Johns Hopkins University,Department of Economics.
  4. Case Karl E. & Quigley John M. & Shiller Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-34, May.
  5. Glenn B. Canner & Karen E. Dynan & Wayne Passmore, 2002. "Mortgage refinancing in 2001 and early 2002," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 469-481.
  6. Campbell, John Y. & Cocco, Joao F., 2007. "How do house prices affect consumption? Evidence from micro data," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 591-621, April.
  7. Sinai, Todd & Souleles, Nicholas S., 2007. "Net worth and housing equity in retirement," CFS Working Paper Series 2007/34, Center for Financial Studies (CFS).
  8. 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.
  9. Alicia H. Munnell, 1992. "Mortgage lending in Boston: interpreting HMDA data," Working Papers 92-7, Federal Reserve Bank of Boston.
  10. Jonathan Skinner, 1993. "Is Housing Wealth a Sideshow?," NBER Working Papers 4552, National Bureau of Economic Research, Inc.
  11. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, vol. 107(445), pages 1701-1727, November.
  12. repec:crr:issbrf:ib2006-43 is not listed on IDEAS
  13. 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.).
  14. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 763-789.
  15. 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.
  16. 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.
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