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.