Housing Debt and Elderly Housing Tenure Choices

We examine the impact of financial leverage, measured by the loan-to-value (LTV) ratios, on elderly homeowners’ mobility and housing tenure choices. Using a 1999-2019 sample from the Panel Study of Income Dynamics (PSID), we find that a higher LTV ratio substantially increases an elderly homeowner’s likelihood of exiting homeownership. In particular, elderly homeowners with an LTV ratio greater than 80% are more than four times likely to exit homeownership than their debt-free counterparts. By distinguishing recent leverage changes either from house price movement or from equity extraction/injection, we further find that the impact of financial leverage is path-dependent. Holding the LTV ratio constant, elderly homeowners are less likely to depart from homeownership if they recently extracted equity from their homes. In addition, we find both financial constraint and long-term indebtedness are important in predicting the likelihood of elderly homeowners exiting homeownership. We further extend our analysis by exploring the effect of the housing market cycle and find the relationship between financial leverage and elderly tenure choices varies across different stages of the cycle. Our findings have several important implications. They not only point to a linkage between housing and mortgage/rental markets but also help to explain the limited size of the U.S. reverse mortgage market