When Illness Strikes Home: The Impact of Severe Health Shocks on Homeownership

We study the impact of severe health shocks, caused by first-time strokes, heart attacks, and cancer diagnoses, on housing tenure choices in the United States. Using data from the Panel Study of Income Dynamics, we estimate a value-added model that controls for pre-shock housing tenure, health status, and an extensive set of individual and household characteristics. We find that experiencing a severe health shock significantly reduces the probability of homeownership by about 2.1 percentage points. This effect remains robust when further controlling for pre-shock disability, healthcare expenditures, and household fixed effects. Furthermore, we show that our results are mainly driven by pre-shock owners exiting from homeownership after the shock, while there is no effect among pre-shock renters. When focusing on exits from homeownership, we also find that the effects are particularly salient among less affluent, older, and unmarried families. Exploring potential mechanisms, we show that health shocks tighten financial constraints by increasing healthcare expenditures and reducing labor supply and labor income.