Housing equity dynamics and home improvements

Abstract

In this study, we examine the effect of housing equity position, measured using the loan-to-value (LTV) ratio, on the probability of home improvements. Using 2001–2011 data from the Panel Study of Income Dynamics (PSID), we find that a higher LTV ratio, in general, reduces the probability of home improvements. We also find that the probability of home improvements depends on the recent change of housing equity position and, more importantly, on the causes of the change. Probability of home improvements decreases more when a high LTV ratio is caused by falling house prices than when it is caused by equity extraction.