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Aging in Place, Housing Maintenance, and Reverse Mortgages

Author

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  • João F Cocco
  • Paula Lopes

Abstract

We study the role of housing wealth in financing retirement consumption. In our model retirees: 1. derive utility benefits from remaining in their home (aging in place); and 2. choose in each period whether to maintain their house. The evidence that we present shows that these features are important in explaining the saving decisions of the elderly. The costs and the maintenance requirement of reverse mortgages (RMs) reduce (or eliminate) the benefits of the loans for retirees who wish to do less maintenance. We evaluate the impact of different loan features on retirees’ utility, cash-flows to lenders, and to the government agency that provides mortgage insurance. We show that combining RMs with insurance against a forced home sale (e.g. due to a move to a nursing home) is Pareto improving and can lead to increased demand for the loans due to product complementarities.

Suggested Citation

  • João F Cocco & Paula Lopes, 2020. "Aging in Place, Housing Maintenance, and Reverse Mortgages," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(4), pages 1799-1836.
    • Handle: RePEc:oup:restud:v:87:y:2020:i:4:p:1799-1836.
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    File URL: http://hdl.handle.net/10.1093/restud/rdz047
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    Citations

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    Cited by:

    1. Pierre-Carl Michaud & Pascal St-Amour, 2023. "Longevity, Health and Housing Risks Management in Retirement," Swiss Finance Institute Research Paper Series 23-18, Swiss Finance Institute.
    2. de Bresser, J.; & Knoef, M.; & van Ooijen, R.;, 2024. "The market for life care annuities: using housing wealth to manage longevity and long-term care risk," Health, Econometrics and Data Group (HEDG) Working Papers 24/11, HEDG, c/o Department of Economics, University of York.
    3. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2024. "Housing, Distribution, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(5), pages 981-1020, August.
    4. Achou, Bertrand, 2021. "Housing liquidity and long-term care insurance demand: A quantitative evaluation," Journal of Public Economics, Elsevier, vol. 194(C).
    5. Eric French & Rory McGee & John Bailey Jones, 2022. "Savings after retirement," IFS Working Papers W22/53, Institute for Fiscal Studies.
    6. Valentinas Rudys, 2023. "How does retirement affect optimal life cycle portfolio allocation between stocks and bonds?," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 212-224, May.
    7. Yasutaka Ogawa & Jiro Yoshida, 2024. "Aging, Housing, and Macroeconomic Inefficiency," IMES Discussion Paper Series 24-E-04, Institute for Monetary and Economic Studies, Bank of Japan.

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