Abstract
Increasing mortgage debt among older households has been cited as evidence of financial distress caused by low financial knowledge,
poor lending practices, and an increased appetite for debt. This paper investigates whether housing leverage among older households
is related to financial sophistication, tax effects, and a desire to increase portfolio allocation to risky assets. Results
indicate a time trend in low housing leverage, but no trend in high housing leverage. While housing leverage increases with
liquidity constraints, it also increases with financial sophistication, and tax and portfolio incentives are strongly related
to high housing leverage. The incentive to borrow against home value created by the deductibility of mortgage interest appears
to encourage greater housing leverage and vulnerability to housing price shocks.
poor lending practices, and an increased appetite for debt. This paper investigates whether housing leverage among older households
is related to financial sophistication, tax effects, and a desire to increase portfolio allocation to risky assets. Results
indicate a time trend in low housing leverage, but no trend in high housing leverage. While housing leverage increases with
liquidity constraints, it also increases with financial sophistication, and tax and portfolio incentives are strongly related
to high housing leverage. The incentive to borrow against home value created by the deductibility of mortgage interest appears
to encourage greater housing leverage and vulnerability to housing price shocks.
- Content Type Journal Article
- Category Original Paper
- Pages 1-13
- DOI 10.1007/s10834-012-9293-4
- Authors
- Hyrum L. Smith, Department of Agricultural and Applied Economics, Virginia Tech, 315 Hutcheson Hall, Blacksburg, VA 24061, USA
- Michael S. Finke, Department of Personal Financial Planning, Texas Tech University, Box 41210, Lubbock, TX 79409, USA
- Sandra J. Huston, Department of Personal Financial Planning, Texas Tech University, Box 41210, Lubbock, TX 79409, USA
- Journal Journal of Family and Economic Issues
- Online ISSN 1573-3475
- Print ISSN 1058-0476