Are Homeownership Patterns Stable Enough to Tap Home Equity?

As retirees live longer, spend more on health care, and get less income replaced by Social Security, many may need to tap their home equity to be comfortable. They could access equity most directly by selling the house where they raised their children and buying a smaller, less expensive house. Such a shift would not only produce a bundle of cash but would also reduce the expenses associated with homeownership. The problem is that most retirees are attached to their homes and want to age in place. The alternative, then, is to tap equity through a reverse mortgage or a state property tax deferral program, both of which allow people to borrow against their house and pay back the loan with interest when they move or die. However, few households choose either of these options. The question is why homeowners – who need the money, have the equity, and want to stay put – avoid borrowing against their home. In part, they may be put off by the complexity of the product or want to avoid liens on an asset that they plan to leave as a bequest. But a more fundamental concern may be the fear that, if they do decide to move, they will have to pay back the loan with interest and could be left with inadequate resources late in life. This brief, which is based on a recent paper, assesses how likely people are to move as they age to see if borrowing against one’s home is a viable financial strategy. The discussion proceeds as follows. The first section introduces the ways to tap home equity while remaining in place. The second section describes the data used for the analysis, the methodology for creating a “synthetic cohort” that can be observed from age 50 until death, and the sequence analysis technique for identifying common housing trajectories. The third section reports the results of applying sequence analysis to the synthetic cohort. Once groups with stable and unstable housing patterns have been identified, the fourth section reports on the characteristics of the homeowners who fit each pattern. The final section concludes that most homeowners experience enough residential stability to tap home equity.