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Home Equity Withdrawal in Retirement

Author

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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.

Suggested Citation

  • Irina Telyukova & Makoto Nakajima, 2010. "Home Equity Withdrawal in Retirement," 2010 Meeting Papers 636, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:636
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    Cited by:

    1. Ralph S.J. Koijen & Stijn Nieuwerburgh & Motohiro Yogo, 2016. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," Journal of Finance, American Finance Association, vol. 71(2), pages 957-1010, April.
    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. Josep Pijoan-Mas & José-Víctor Ríos-Rull, 2014. "Heterogeneity in Expected Longevities," Demography, Springer;Population Association of America (PAA), vol. 51(6), pages 2075-2102, December.
    5. 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.
    6. Pashchenko, Svetlana, 2013. "Accounting for non-annuitization," Journal of Public Economics, Elsevier, vol. 98(C), pages 53-67.
    7. Viola Angelini & Agar Brugiavini & Guglielmo Weber, 2014. "The dynamics of homeownership among the 50+ in Europe," Journal of Population Economics, Springer;European Society for Population Economics, vol. 27(3), pages 797-823, July.
    8. Sabina Źróbek & Elżbieta Zysk & Mirosław Bełej & Natalija Lepkova, 2020. "Do Women Affect the Final Decision on the Housing Market? A Case Study," Sustainability, MDPI, vol. 12(11), pages 1-23, June.
    9. 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.
    10. David Love & Lucie Schmidt, 2015. "Comprehensive Wealth of Immigrants and Natives," Working Papers wp328, University of Michigan, Michigan Retirement Research Center.

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