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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.

Suggested Citation

  • 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.
    • Handle: RePEc:crr:issbrf:ib2008-8-12
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    1. 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.
    2. 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.
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    13. 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.
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    1. Zan Yang & Ying Fan & Liqing Zhao, 2018. "A Reexamination of Housing Price and Household Consumption in China: The Dual Role of Housing Consumption and Housing Investment," The Journal of Real Estate Finance and Economics, Springer, vol. 56(3), pages 472-499, April.
    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. Hyrum Smith & Michael Finke & Sandra Huston, 2012. "Financial Sophistication and Housing Leverage Among Older Households," Journal of Family and Economic Issues, Springer, vol. 33(3), pages 315-327, September.
    4. Dekkers, Gijs, 2008. "Are the old poor? A discussion and some cursory evidence," MPRA Paper 29436, University Library of Munich, Germany.
    5. 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.

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