Home Equity Withdrawal in Retirement

We document in the data and study theoretically the patterns of home equity withdrawal among retirees. Using the American Housing Survey, Health and Retirement Study, and the Survey of Consumer Finances, we show that as home equity has become more accessible over time, retirees have been increasingly relying on home equity borrowing, with increasing preference for relatively new and flexible instruments like home equity lines of credit and reverse mortgages, and that this upward trend continued even as house prices began to decline and the rest of the population contracted their borrowing against equity. Simultaneously, we document that the cost of living for retirees has been increasing, due to factors such as rising healthcare costs. One goal is to understand the driving forces behind home equity borrowing trends, and their welfare implications. More broadly, we are also interested in their macroeconomic and policy implications. We present a dynamic stochastic partial-equilibrium overlapping-generations model that captures and analyzes these trends in the data given the liberalization of financial markets in the last 25 years and increasing costs of living.