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The House: Is it an Asset or a Liability?

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Abstract

Most households enter retirement as homeowners and only sell after a spouse enters a nursing home or dies, with recent retirees having greater housing wealth but also greater mortgage debt. We show that the share of homeowners entering retirement with mortgages increased from 37.9% for early birth cohorts in the Health and Retirement Study to 50.8% for recently retiring cohorts, and their median mortgage balance approximately doubled, to $108,523 in 2022 dollars. Analyzing socioeconomic characteristics of mortgage holders, we find that Hispanic and especially Black households with mortgages have extremely low median financial assets, while financial assets for white households, though higher, remain insufficient to cover their mortgage debt. We additionally show that, conditional on demographic characteristics and house value, households with larger mortgages hold less financial assets, retire later, experience greater declines in consumption during retirement, and sell their houses earlier as they age. For some households, therefore, mortgage-financed housing wealth may be a liability in old age. Lastly, we develop an intertemporal optimization model of consumption and dissaving choices during retirement. The model includes long-term care risk, Medicaid, and a luxury bequest motive. We find that mortgage-financed illiquid housing provides little bequest value but acts as informal insurance against long-term care cost risk. The value, though small for households with low financial assets, reaches as high as 52% of the mortgage balance for households with substantial financial assets to protect. For such households, therefore, mortgage-financed housing wealth in retirement may be a valuable asset.

Key Findings

  • The share of homeowners entering retirement with mortgages increased from 37.9% for birth cohorts turning 65 from 1989 to 1995 to 50.8% for cohorts turning 65 from 2013 to 2018.
  • The median mortgage balance among mortgage holders at retirement approximately doubled, from $46,677 to $108,523 in 2022 dollars.
  • Black households with mortgages have extremely low median financial assets. While Hispanic mortgage holders do as well, they are less likely to hold mortgages than Black households are. White households with mortgages hold comparatively ample financial assets relative to Black and Hispanic mortgage holders, yet they hold less in financial assets than do white households without mortgages, and their assets remain insufficient to cover their mortgage debt.
  • Conditional on demographic characteristics and house value, households with larger mortgages hold fewer financial assets, retire later, experience greater declines in consumption during retirement, and sell their houses earlier as they age.
  • An intertemporal optimization model finds that mortgage-financed illiquid housing acts as informal insurance against long-term care cost risk. The value, though small for households with low financial assets, reaches as high as 52% of the mortgage balance for households with substantial financial assets to protect.
  • In sum, mortgage-financed housing wealth may be an asset for some higher-wealth households, who gain from its use as a hedge against long-term care cost risk. It may be a liability for others, though, especially minority households.

Citation

Friedberg, Leora, Wei Sun, and Anthony Webb. 2023. “The House — Is it an Asset or a Liability?” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2023-473. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp473.pdf

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Project

Paper ID

WP 2023-473

Publication Type

Working Paper

Publication Year

2023