Aging and Housing Equity

In the absence of a large shock like a spouse's death or entry into a nursing home, home equity remains generally stable throughout retirement.

Although home equity is an important component of most families' net worth at retirement, NBER Research Associates Steven Venti and David Wise find that retirees generally do not use that equity to pay their living costs in retirement. In Aging and Housing Equity: Another Look (NBER Working Paper No. 8608), they observe that, in the absence of a large shock like a spouse's death or entry into a nursing home, home equity remains generally stable throughout retirement. Even when a shock occurs, large drops in home equity are "the exception rather than the rule."

The authors use survey data from the Health and Retirement Study (HRS), the Asset and Health Dynamics Among the Oldest Old (AHEAD), and the Survey of Income and Program Participation (SIPP). The SIPP data cover a large number of homeowners, aged 26 to 80, over the years 1984 to 1995. These data allow groups of households to be followed over time.

Although two-person households are more likely to own a home than one-person households, Venti and Wise find no apparent decline in home ownership in either group through age 70. For example, at age 26 between 15 and 20 percent of one-person households and 50 percent of two-person households own a home. By age 70, over 60 percent of one-person households and over 80 percent of two-person households own a home. Overall, the fraction of homeowners changes little after age 70.

The AHEAD data suggest that 97 percent of two-person homeowner households continued to own a home two to three years later, as long as the household still had two members. A household member's death decreased the ownership rate to about 89 percent, while admission to a nursing home decreased it to 75 percent. In the absence of any shock, 91 percent of continuing one-person homeowner households remained homeowners two to three years later. Even after a household member was admitted to a nursing home, 40 percent of one-person households continued to own a home.

Home equity appears to increase moderately between ages 70 and 75. The authors' simulations of changes in home equity based on the available data suggest that although "income-poor and house-rich families are more likely to reduce equity when they move, and house-poor and income rich families are more likely to increase" it, families that move and purchase another home on average tend to increase equity. Absent any shocks, two-person homeowner households in the AHEAD sample had a 1.5 percent probability leaving the ranks of homeowners each year. The probability of giving up home ownership for one-person households was 4 percent. If a household member died or entered a nursing home, the probability of discontinuing ownership was 21 percent.

Overall, the home equity for the older people in the AHEAD sample declined by 1.76 percent per year. Almost all of this decline was accounted for by households that experienced a death or a nursing home admission. While the annual rate of decline in home equity for continuing two-person households was just 0.11 percent, the annual rate of decline in home equity of two-person households in which a member died or entered a nursing home was 7.8 percent.

These results suggest that retired people primarily consider their houses a place to live. While they may use home equity as an emergency fund in catastrophic circumstances, this is the exception rather than the rule. In general, home equity is not used to finance post-retirement living.

-- Linda Gorman