Housing leverage, home value, and retirement

Abstract

We study the effect of housing leverage, measured using the loan‐to‐value (LTV) ratio, on homeowners' retirement decisions. We find that in general, elevated LTV ratios delay retirements. By decomposing the changes of the current LTV ratio into (1) equity extractions, (2) equity build‐up, (3) home value increases, and (4) home value decreases, we find that equity extractions and declining home value drive the negative relationship between housing leverage and retirement. In contrast, retirement decisions are less responsive to equity build‐up and home value appreciation. Our results suggest that the influence of housing leverage on retirement decisions is path‐dependent and asymmetric. We also find that transitions into retirement are more sensitive to home price declines, and retirement reversals are often triggered by equity extraction. Further analyses also reveal that the impact of housing leverage on retirement differs by household age and financial constraints, and it also varies across different stages of a housing market cycle.