Home Equity Borrowing Research Articles

What Did Homeowners Do with Home Equity Borrowing? Contemporaneous and Long‐Term Effects

AbstractUsing a panel sample from the Panel Study Income Dynamics (1999–2015), I find that homeowners' contemporaneous spending and nonhome wealth increased with home equity withdrawals, but their longer term spending and wealth declined if their home equity was extracted during the housing boom period. Following Hurst and Stafford's (2004) definition of liquidity constraint, I find that the constrained homeowners' contemporaneous spending increased less, while their financial wealth increased more than those of the unconstrained. Unconstrained homeowners invested more than constrained homeowners in nonhome real estate and businesses. In the long run, the consumption spending of both groups persistently declined, while their wealth recovered from initial declines.

Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016

This paper studies the secular increase in U.S. household debt and its relation to growing income inequality and financial fragility. We exploit a new household-level dataset that covers the joint distributions of debt, income, and wealth in the United States over the past seven decades. The data show that increased borrowing by middle-class families with low income growth played a central role in rising indebtedness. Debt-to-income ratios have risen most dramatically for households between the 50th and 90th percentiles of the income distribution. While their income growth was low, middle-class families borrowed against the sizable housing wealth gains from rising home prices. Home equity borrowing accounts for about half of the increase in U.S. household debt between the 1970s and 2007. The resulting debt increase made balance sheets more sensitive to income and house price fluctuations and turned the American middle class into the epicenter of growing financial fragility.

Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016

This paper studies the secular increase in U.S. household debt and its relation to growing income inequality and financial fragility. We exploit a new household-level data set that covers the joint distributions of debt, income, and wealth in the United States over the past seven decades. The data show that increased borrowing by middle-class families with low income growth played a central role in rising indebtedness. Debt-to-income ratios have risen most dramatically for households between the 50th and 90th percentiles of the income distribution. While their income growth was low, middle-class families borrowed against the sizable housing wealth gains from rising home prices. Home equity borrowing accounts for about half of the increase in U.S. housing debt between the 1980s and 2007. The resulting debt increase made balance sheets more sensitive to income and house price fluctuations and turned the American middle class into the epicenter of growing financial fragility.

Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016

This paper studies the secular increase in U.S. household debt and its relation to growing income inequality and financial fragility. We exploit a new household-level dataset that covers the joint distributions of debt, income, and wealth in the United States over the past seven decades. The data show that increased borrowing by middle-class families with low income growth played a central role in rising indebtedness. Debt-to-income ratios have risen most dramatically for households between the 50th and 90th percentiles of the income distribution. While their income growth was low, middle-class families borrowed against the sizable housing wealth gains from rising home prices. Home equity borrowing accounts for about half of the increase in U.S. household debt between the 1970s and 2007. The resulting debt increase made balance sheets more sensitive to income and house price fluctuations and turned the American middle class into the epicenter of growing financial fragility.

Inequality, household debt and financial instability: An agent-based perspective

Our paper contributes to the literature on the causes of the 2007–2008 financial crisis in the United States. By means of an agent-based model, we replicate an artificial credit-network economy in order to assess the impact of growing income inequality in the presence of peer effects and home equity borrowing. We show that the resulting debt-financed consumption boom jeopardises the stability of the economic system, thus paving the way for a financial crisis. Our model includes a behavioural rule for consumption based on expenditure cascades, a hierarchical structure of household finance, an articulated credit market with collateralised consumption loans and mortgages and a simple housing market. Results show that the model is able to capture the economic and social pressure of inequality on low and middle income households that pushes them to increase their consumption via home equity extraction. Rising non-performing loans lead to higher bad debt on the banks’ balance sheets and, consequently, to the emergence of a crisis as an endogenous dynamic.

Household Leverage and the Recession

A salient feature of the recent recession is that regions that have experienced the largest changes in household leverage have also experienced the largest declines in output and employment. We study a cash-in-advance economy in which home equity borrowing, alongside public money, is used to conduct transactions. Declines in home prices tighten the cash-in-advance constraint, triggering recessions. We parameterize the model to match the key cross-sectional features of the data. The model implies that real activity is very sensitive to liquidity shocks, but not to credit shocks, and that monetary policy can significantly reduce the severity of credit-driven recessions.

Do Restrictions on Home Equity Extraction Contribute to Lower Mortgage Defaults? Evidence from a Policy Discontinuity at the Texass Border

Texas is the only US state that limits home equity borrowing to 80 percent of home value. This paper exploits this policy discontinuity around the Texas’ interstate borders and uses a multidimensional regression discontinuity design framework to find that limits on home equity borrowing in Texas lowered the likelihood of mortgage default by about 1.5 percentage points for all mortgages and 4-5 percentage points for nonprime mortgages. Estimated nonprime mortgage default hazards within 25 to 100 miles on either side of the Texas’ border are about 20 percent smaller when crossing into Texas.

House Prices, Home Equity Borrowing, and Entrepreneurship

This paper shows that housing wealth helps alleviate credit constraints for potential entrepreneurs by enabling home owners to extract equity from their property and invest it in their business. Using a large U.S. individual-level survey dataset for the 1996–2006 period, we find that a 10% increase in home equity raises the share of individuals who transition into self-employment each year from 1% to 1.07%. Our results persist when we use proxies for aggregate housing demand shocks and for the topological elasticity of housing supply to generate variation in home equity that is orthogonal to entrepreneurial choice

The Impact of Housing Markets on Consumer Debt: Credit Report Evidence from 1999 to 2012

We estimate the response of consumer debt portfolios to pronounced housing market swings from 1999 to 2012 using Equifax‐sourced credit report data and a variety of identification approaches. We find: (i) the extraordinary climb in home equity debt from 2002 to 2006 is an expression of a stable, longer‐term relationship between house price growth and home equity borrowing; (ii) all preboom homeowners, and older and prime postboom homeowners, demonstrate near dollar‐for‐dollar substitution between (expensive) credit card and (cheap) home equity debt in response to home equity changes; and (iii) little evidence of substitution between home equity and student loan debt.

Do Restrictions on Home Equity Extraction Contribute to Lower Mortgage Defaults? Evidence from a Policy Discontinuity at the Texas Border

Texas is the only US state that limits home equity borrowing to 80 percent of home value. This paper exploits this policy discontinuity around Texas’ interstate borders and uses a multidimensional regression discontinuity design framework to find that limits on home equity borrowing in Texas lowered the likelihood of mortgage default by about 1.5 percentage points for all mortgages and 4–5 percentage points for non-prime mortgages. Estimated non-prime mortgage default hazards within 25 to 100 miles on either side of the Texas border are about 20 percent smaller when crossing into Texas. (JEL G21, G28, R31)

Entrepreneurs' Use of Home Equity Loans During Credit Crises

During the Great Recession home equity loan balances increased despite aggregate home equity falling (and overall debt not changing). Entrepreneurs are responsible for 77% of this increase, while only representing 13% of the population. I argue that this reflects entrepreneurs having to rely on loans backed by personal assets to overcome the crunch. I use micro-data on entrepreneurs' finances from the 2007-2009 panel edition of the Survey of Consumer Finances to establish that (1) of entrepreneurs in 2007 homeowners were less likely to exit by 2009 (18%) than non-homeowners (28%) and that exiters had less home equity and lower access to home equity borrowing; and (2) new entrepreneurs in 2009 had 63% more home equity than those in 2007, despite house values falling. This leads me to conclude entrepreneurs substituted scarce business financing opportunities for personal financing, in the form of home equity loans. In sum, loans backed by personal assets, specifically their home, allowed entrepreneurs to alleviate the pressures of tightened credit standards.

Risk and reward of home equity borrowing for investment in Canada, a stochastic analysis

According to Canadian tax law one way of transforming from non-tax deductible (personal mortgage) to tax deductible interest expenses is to borrow against home equity to make investments. A re-advanceable mortgage is a product in which the mortgagor immediately re-borrows principal as it is paid. We assume the re-borrowed funds are invested into a single risky asset and study the risk associated with this strategy to provide an accurate description of the mortgagor’s position. Our model accommodates stochastically changing interest rates and housing prices. We find that immediately borrowing from the increase in housing price decreases the expected mortgage payoff time, but also significantly increases the risk of taking a much longer time to pay off the mortgage. The risk of this strategy is very sensitive to changes in housing price volatility. Additionally, both the expected mortgage payoff time and the risk of taking a long time to pay off the mortgage increase with interest rate volatility. To reduce both the expected mortgage payoff time and the risk of a longer payoff time, the asset chosen should be (i) negatively correlated with housing price; and (ii) positively correlated with interest rates. From the case study using historical data we find that business cycle has an effect on the strategy’s performance and a reasonable decision rule would be to (i) implement this strategy at the beginning or in the middle of an expansionary period; and (ii) delay its implementation otherwise. Results of this study are relevant to homeowners, financial planners and policymakers.

Do Restrictions on Home Equity Extraction Contribute to Lower Mortgage Defaults? Evidence from a Policy Discontinuity at the Texas’ Border

Texas is the only US state that limits home equity borrowing to 80 percent of home value. This paper exploits this policy discontinuity around the Texas’ interstate borders and uses a multidimensional regression discontinuity design framework to find that limits on home equity borrowing in Texas lowered the likelihood of mortgage default by about 1 percentage point for all mortgages and 2-4 percentage points for nonprime mortgages. Estimated nonprime mortgage default hazards within 25 to 100 miles on either side of the Texas’ border are about 15 percent smaller as one crosses into Texas.

Evidence on the Relationship between Housing and Consumption in the United States: A State‐Level Analysis

We estimate the dynamic effects of U.S. housing market shocks on state‐level spending and home prices from a dynamic common factor model, and identify housing demand and supply shocks using a sign‐restrictions approach. While state‐level spending and house prices gradually respond positively and persistently to aggregate housing demand shocks, there is significant variation across states in the magnitude of these responses. Cross‐state regressions of the estimated responses on an index of mortgage market development suggest that spending in states with greater opportunities for home equity borrowing is more sensitive to housing demand shocks than in states with fewer opportunities, which is consistent with the prominence of a “collateral” channel over a “wealth” channel in explaining the link between housing and the overall economy.

The empirical relationship between home equity borrowing and durable goods purchases

The current financial crisis has drawn attention to consumers' use of the Home Equity Line of Credit (HELOC) to finance consumption. Although many economists have repeatedly noted that such borrowing fueled additional consumption, attempts to quantify the boost to consumer spending have been relatively few. Similarly, attempts to classify the types of goods consumers purchased with their HELOC facilities have been sparse. The present article remedies both situations. The article shows that, in the aggregate, for every one percentage increase in HELOC lending, durable goods consumption increased by between 17% and 25% (on average, from 1991 to 2008). The article uses aggregate consumption data compiled from the Consumer Expenditure Survey, and HELOC data taken from banks' reported financial statements as filed with the Federal Financial Institution Examination Council (FFIEC). A regional-level panel of aggregate consumption and lending is constructed for the years 1991 to 2008. We examine several different...

Home Equity Withdrawal in Retirement

The authors study empirically and theoretically the patterns of home equity withdrawal among retirees, using a model in which retirees are able to own or rent a home, save, and borrow against home equity, in the face of idiosyncratic risks concerning mortality, health, medical expenditures, and household size and observed house price changes. The estimated model is found to successfully replicate the patterns of homeownership and the saving/borrowing decisions of retirees. They use the estimated model for several counterfactual experiments. There are three main findings. First, the model predicts that a house price boom suppresses homeownership and increases borrowing, while a decline in house prices has the opposite effect. Second, the costs of home equity borrowing restrict the borrowing of retirees, and thus a reduction of such costs (e.g., lower costs of reverse mortgage loans) might significantly raise home equity borrowing. Third, there are two implications for the puzzle. Although the cost of borrowing against equity in the house affects the borrowing of retirees, it does not affect total asset holding, implying that equity borrowing costs do not seem to offer a quantitatively significant contribution to resolving the puzzle. On the other hand, the magnitude of the puzzle might be exaggerated, because a sizable part of retirement saving is due to house price appreciation.

Did Easy Credit Lead to Overspending? Home Equity Borrowing and Household Behavior in the Early 2000s

Using data from the Panel Study of Income Dynamics, this paper examines how households' home equity extraction during the previous decade affected their spending and saving behavior.The study makes use of recently released 2009 housing and wealth data as well as the extensive data on household expenditures and balance sheets that are available starting in 1999. The results show that during the height of the house-price boom (the 2003-2005 period) a one-dollar increase in equity extraction led to 14 cents higher household expenditures. Households also spent 21 cents of their extracted equity on home improvements and additions and saved roughly 19 cents of each dollar extracted through balance-sheet reshuffling. The spending, saving, and residential investment patterns are similar during the 2001-to-2003 and 2005-to-2007 periods. There is less evidence of households' extracting equity to fund expenditures prior to 2001, except for health care and transportation-related expenses. Overall, the results are consistent with households' extracting equity to fund necessary expenditures and desired investments.

Home Equity, Fungibility, and Consumption: The Increasing Rationalization of Society

The article argues that home equity borrowing is an instance of Max Weber's concept of increasing rationalization of society. The dramatic growth in U.S. home equity borrowing is associated with an increasingly fungible orientation to the home, in which a significant portion of this borrowing is used to fund additional spending on consumer goods. Survey data are used to support the notion that rationalization is spread by a process of diffusion.