Homeownership, Social Insurance, and Old-Age Security in the United States and Europe Stipica Mudrazija and Barbara A. Butrica 19th Annual Joint Meeting of the Retirement Research Consortium August 3-4, 2017 Washington, DC

Motivation Relatively few Americans have substantial savings outside of their employer- sponsored retirement plans, yet most own their homes. Homeownership has always been recognized as a potential source of retirement security: Rent-free place to live in older age (after a mortgage has been paid off) Resource to pay for unplanned events or support general consumption Many governments are increasingly promoting homeownership as an effective way of building assets, a de facto self-insurance mechanism for old-age security, and a (partial) substitute for various social transfers.

Research Aims Compare recent trends in homeownership rates among older adults in the United States and Europe and provide a comparison of the key characteristics of housing-related policies across countries Examine housing equity trends among older homeowners in the United States and Europe Provide an overview of equity release options and estimate how much older homeowners could increase their household incomes by fully monetizing their housing equity Critically discuss prospects for and limitations of home equity release and asset based welfare policies

Recent Trends in Homeownership and Housing Policies

Key Housing Policy Characteristics Three key areas of government intervention into housing market: Mortgage access, that is, regulations affecting credit markets and access to mortgage loans (as reflected in typical and maximum loan-to-value ratio, typical mortgage loan maturity, or prevalent interest rate type) Direct government support for homebuyers, that is, tax treatment of homebuyers (transactions costs, property tax, and property tax relief) Government support for non-homeowners (rent control, tenant (legal) protections, subsidized rent accommodation, and social housing)

Housing policy support rankings, by type of policy support Mortgage access   Direct government support for homebuyers Government support for non-homeowners Denmark 3.0 2.7 Austria Netherlands France 2.3 United States Sweden Belgium 2.6 2.2 Germany 2.0 2.4 1.7 1.8 Spain 1.9 1.3 Italy 1.5 1.0

Recent Trends in Home Equity and Housing Debt

Housing Equity Release Options and Potential Financial Impact on Older Adults

Housing Equity Release Options Traditional options for extracting liquidity from a home: Downsizing Mortgage refinancing or a second mortgage Selling property and leasing it back Dedicated financial products to facilitate equity release: Reverse/lifetime mortgages Home reversions

Prospects and Limitations of Home Equity Release and Asset Based Welfare Policies

Limitations Objective limitations: High costs of withdrawing housing equity Uncertainty about remaining years of life and financial resources needed Adverse impact on eligibility for social benefits Concentration of housing wealth among (upper) middle- and higher- income individuals Subjective limitations: Aversion toward (additional) debt in old age Different (often emotional) attitude toward housing vs other types of wealth Bequest motive Lack of trust in financial institutions

Prospects Using home equity to improve retirement security remains a potentially attractive option for a substantial number of older adults. Assuming that 75 percent of home value is cashed-out, the U.S. households ages 65 and older could tap into more than $3 trillion of net housing wealth. Differences in housing wealth and income distribution are sufficiently large that accounting for homeownership reduces income inequality and poverty rates. Future cohorts of older homeowners may be more receptive to using their housing wealth to supplement their retirement incomes. However, many younger Americans and Europeans may find it harder to build home equity than their parents’ generation.