The Impact of House Price Movements on the Wealth Accumulation of Older Households

by Wei Sun, Boston College

This project will use Health and Retirement Study (HRS) data to investigate the impact of house price movements on the amount and composition of the wealth of households approaching retirement. In particular, it will examine how household portfolios evolved after recent increases in house prices. Did households borrow against the additional housing equity to finance current consumption, to pay-off higher interest debt or to increase their holdings of financial, housing, or pension assets? Did they reduce the rate at which they accumulated financial or pension assets? Or did house price movements have little or no effect on the behavior of existing home-owners.

Using HRS geographic identifiers available to researchers on a restricted basis, this project will identify the effects by comparing the behavior of households living in areas that experienced rapid house price appreciation with that of households living in areas where increases in prices were more modest. It will carefully control for local economic conditions that might affect both house prices and household wealth accumulation.

The research will use the above estimates to investigate the impact of recent increases in house prices on household financial preparedness for retirement. An increase in housing wealth will only improve preparedness to the extent that it can be accessed for nonhousing consumption. Because housing equity can only be fully consumed in retirement by selling the house, increases in housing wealth that are offset by mortgage debt or reductions in financial wealth will actually leave household less well prepared for retirement. It will also consider whether there are systematic differences in behavior between birth cohorts or by socio-economic status.

More tentatively, the project will also consider how households might respond to a prolonged decline in house prices.

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