Non-housing Wealth Research Articles

The Link between Individual Expectations and Savings: Do Nursing Home Expectations Matter?

Long-term care is an important issue facing older A mericans. Those who reach age 65 have a 40% chance of entering a nursing home, and about 10% of those who enter will stay there for at least five years. The costs of a stay are high with on average US$70,000 annually for a private room. Long-term stays in nursing homes are, therefore, not likely, but very expensive. In this paper, we examine individual expectations about future nursing home entry and st udy the relationship between these expectations and savings behavior, using data from the Health and Retirement Study. We find a clear relation between subjective expecta tions and probability of future nursing home entry, but no effect of these expectat ions on savings behavior for the majority of individuals. Only those with small posi tive non-housing wealth, which lies under the threshold for Medicaid eligibility, incre ase their savings rate in response to an increase in expectations. A plausible explanatio n for this might be that there is only little dissaving in order to qualify for Medicaid a nd that the fact that most respondents are old and live off a fixed income which makes it difficult for them to increase their savings enough to make a difference.

An Aggregate Economy with Different Size Houses

We build an aggregate model with difierent size houses and liquid assets. Typical households are born, are subject to idiosyncratic earnings risk and save for both life cycle reasons and housing reasons. Typically, a subset of these households, after accumulating some assets, put a down payment and buy a small, starter’s, house or ∞at. As time passes, some households upgrade to a larger and nicer house. Households with houses may also eventually downgrade to a ∞at or even to no house and ∞at owners may sell. Our speciflcation attempts to replicate some important features of modern aggregate economies: The distribution of earnings and of housing and non-housing wealth as well as some macroeconomic aggregates, including features of the mortgage issuing sector.

Housing, portfolio choice and the macroeconomy

This paper investigates the properties of the wealth distribution and the portfolio composition regarding housing and equity holdings, and their relationship to macroeconomic shocks. To this end, I construct a business cycle model in which agents differ in age, income and wealth. Housing provides shelter services and serves as collateral for loans. The model is consistent with several facts such as the life-cycle pattern of housing-to-wealth ratios, the larger degree of concentration for non-housing wealth, the smaller weight of housing in richer households’ portfolios as well as the larger housing-to-wealth ratios in recessions. In addition, the model shows that while relaxing the collateral constraint does not impact the business cycle dynamics for the entire economy, it significantly alters the behavior of residential and business investment for the younger and poorer fraction of the population.

Housing Tenure and Wealth Distribution in Life-Cycle Economies

Common practice in the housing and wealth distribution literature has proceeded as if the modeling of housing rental markets was unnecessary due to renters' relative low levels of wealth and the small fraction they represent in the total population. This paper shows, however, that their inclusion matters substantially when dealing with wealth concentration over the life cycle. Renters are concentrated in the poorer and younger groups. This concentration results in a pattern of housing wealth concentration over an agent's life that is decreasing, with a slope as steep as that of nonhousing (or financial) wealth. The author constructs an overlapping-generations economy with a housing rental market that is consistent with this fact.

Housing, Portfolio Choice, and the Macroeconomy

Much of the macroeconomics literature dealing with wealth distribution has abstracted from modeling housing explicitly. This paper investigates the properties of the wealth distribution and the portfolio composition regarding housing and equity holdings and their relationship to macroeconomic shocks. To this end, I construct a business cycle model in which agents differ in age, income, and wealth and derive utility from housing services. The model is consistent with several facts such as the life-cycle pattern of housing-to-wealth ratios, the larger degree of concentration for nonhousing wealth, and the smaller weight of housing in richer households' portfolios as well as the larger housing-to-wealth ratios in recessions. In addition, the model delivers the familiar business-cycle moments regarding relative standard deviations and procyclicality of consumption, investment, and employment.

Parental net wealth and personal consumption

This paper uses data from the 1988 to 1991 PSID to examine the relationship between parental net wealth and consumption behavior of adult children. In a model where the probability of receiving a future transfer from the parent is an increasing function of the level of parental net wealth, a non-linear relationship is expected. The results in this study are consistent with such a relationship. Parental net wealth is found to have a positive influence on children’s consumption only at very high levels. In addition, this relationship appears to apply only to parental housing wealth and not parental non-housing wealth.

Deficiency Judgments and Borrower Maintenance: Theory and Evidence

It is well known that when property rights to an asset are divided, individual right holders may not have adequate incentives to invest in proper maintenance. In this paper, weexamine how mortgage laws affect the nature of the lender's claim to the house, and howthat claim in turn affects the incentives of borrowers to invest in home maintenance. Thespecific law that we examine concerns the right of lenders to pursue a borrower's nonhous-ingwealth in the event of default if the value of the house is less than the mortgage balance. Most states allow lenders to collect such “deficiency judgments,” while others either prohibit, or make it difficult to obtain them. The theoretical model developed inthis paper predicts that borrowers will maintain at a higher rate when lenders are allowedto seek deficiency judgments. Intuitively, when borrowers' nonhousing wealth is at risk,they have an incentive to invest more in maintenance in order to reduce the likelihood that the value of the property will fall below the mortgage balance. We attempt to measure this effect using data on household maintenance obtained from the American Housing Survey along with information on differences in mortgage laws across states. We estimate a three-equation simultaneous system relating maintenance expenditures, house value, and mortgage rates. The results provide confirmation that variation in mortgage laws affect homeowner maintenance in the manner predicted by the theory.

Evidence on the Demand for Mortgage Debt by Owner-Occupants

This paper explores the relationship between household mortgage debt burdens and housing consumption, periodic income, nonhousing wealth, the income tax position of the household, expected mobility, and other micro-level characteristics that proxy for household risk preferences and life cycle effects. We use 1985 and 1989 American Housing Survey data to estimate mortgage debt level equations simultaneous with house value equations, controlling for the contemporaneous nature of these two choices. We find that larger debt levels are positively associated with greater value residences and with the level of household income. Numerous household level demographic characteristics are also systematically related to mortgage demand. Of particular interest are our findings that the use of mortgage debt is affected significantly by the rate of tax savings on mortgage interest deductions and by the expected mobility of the household.

Long-Term Care, Medicaid, and Impoverishment of the Elderly

The 1989 Long Term Care Survey was used to assess the extent to which entry of disabled elderly into nursing homes depletes personal wealth ("spenddown"); the effect of state eligibility rules on this process, on incentives to shield assets for Medicaid eligibility, and on out-of-pocket prices for nursing-home care; and whether the disabled elderly's housing wealth represents potential revenue for Medicaid. Most disabled elderly in the community were either Medicaid eligible, or would have been soon after entering a nursing home. Variations in state Medicaid eligibility rules do not explain differences in the spenddown process: the amount of nonhousing wealth of most disabled elderly seldom warranted its transfer to relatives in order to secure Medicaid benefits, nor would their housing wealth have offered more than limited revenue for Medicaid.