The House: Is it an Asset or a Liability?

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.