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The Housing Bubble and Retirement Security

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  • Alicia H. Munnell
  • Mauricio Soto

Abstract

House prices rose 60 percent between 2000 and 2007 before the housing bubble burst. The question is whether the housing boom made people better or worse prepared for retirement. Theory says that infinitely-lived households experience no increase in their real net worth when housing prices increase and would therefore have no reason to borrow against the increment in their home equity to increase their consumption. Two pieces of evidence suggest that they did tap their equity: the big increase in mortgage borrowing has accompanied the run-up in house prices, and a number of studies have reported a positive relationship between house prices and consumption. Using the 2004 Survey of Consumer Finances (SCF) this paper investigates the probability of households extracting home equity through an increase in housing-related debt, the probability that they use their housing-related borrowing for consumption, and finally the factors that determine the level of consumption spending out of their increased debt. The results show that while homeowners appear to take the present discounted value of future rents into account, many of them extracted equity and used it for consumption. A substantial proportion – perhaps 30 percent – of older households will be less secure in retirement because of the housing bubble.

Suggested Citation

  • Alicia H. Munnell & Mauricio Soto, 2008. "The Housing Bubble and Retirement Security," Working Papers, Center for Retirement Research at Boston College wp2008-13, Center for Retirement Research, revised Aug 2008.
    • Handle: RePEc:crr:crrwps:wp2008-13
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    1. Alicia H. Munnell & Mauricio Soto, 2008. "The Housing Bubble and Retirement Security," Issues in Brief ib2008-8-12, Center for Retirement Research, revised Aug 2008.
    2. Case Karl E. & Quigley John M. & Shiller Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-34, May.
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    1. Zan Yang & Ying Fan & Liqing Zhao, 2018. "A Reexamination of Housing Price and Household Consumption in China: The Dual Role of Housing Consumption and Housing Investment," The Journal of Real Estate Finance and Economics, Springer, vol. 56(3), pages 472-499, April.
    2. Alicia H. Munnell & Mauricio Soto, 2008. "The Housing Bubble and Retirement Security," Issues in Brief ib2008-8-12, Center for Retirement Research, revised Aug 2008.
    3. Hyrum Smith & Michael Finke & Sandra Huston, 2012. "Financial Sophistication and Housing Leverage Among Older Households," Journal of Family and Economic Issues, Springer, vol. 33(3), pages 315-327, September.
    4. Dekkers, Gijs, 2008. "Are the old poor? A discussion and some cursory evidence," MPRA Paper 29436, University Library of Munich, Germany.
    5. Barry Bosworth & Rosanna Smart, 2009. "The Wealth of Older Americans and the Sub-Prime Debacle The Wealth of Older Americans and the Sub-Prime Debacle," Working Papers, Center for Retirement Research at Boston College wp2009-21, Center for Retirement Research, revised Nov 2009.

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