Are Homeownership Patterns Stable Enough to Tap Home Equity?

Abstract

As retirees live longer, spend more on medical care, and get less income replaced by Social Security, many may need to tap their home equity to be comfortable in retirement.  The most direct way to access home equity is downsizing, but few choose this option because they generally prefer to stay in their house.  The alternative is withdrawing equity through a reverse mortgage or a property tax deferral, but few households use these options either.  A potential reason that homeowners are reluctant to borrow against their house is that, if they do decide to move, they have to pay back the loan with interest, which could leave them with inadequate resources at a vulnerable time in their life.  This paper assesses how likely households are to move as they age to see if borrowing against one’s home is a viable financial strategy.  The analysis uses the Health and Retirement Study (HRS) to analyze three cohorts: the HRS cohort (ages 50-54 in 1992), the AHEAD cohort (ages 70-74 in 1993), and a synthetic cohort covering the whole lifespan from age 50 to death.  The analysis identifies typical housing trajectories in retirement and explores how often, and for whom, tapping home equity would be a viable strategy.

The paper found that:

• Seventy percent of households have very stable homeownership patterns, even over several decades. They either stay in the home they own in their 50s (53 percent) or purchase a new home around retirement and stay for the rest of their life (17 percent).
• The 30 percent of households that do move consist of two distinct subgroups. Frequent movers (14 percent) appear to face labor market challenges.  Late movers (16 percent) look like a slightly more affluent version of the households that never move, but then face a health shock that forces them out of the home that they owned into a rental unit or a long-term services and supports facility.
• Overall, the findings largely support the narrative from prior research that most people want to age in place and move only in response to a shock.

 
The policy implications of the findings are:

• Most homeowners experience enough residential stability to tap home equity through reverse mortgages or property tax deferrals.
• Retirees might be more likely to tap their home equity if they felt that they had adequate public or private insurance protection against the risk of needing long-term services and supports.