Panel Paper: Neighborhood House Price Declines, Older Adults, and Transfers to Younger Generations

Friday, November 9, 2012 : 10:25 AM
Salon E (Radisson Plaza Lord Baltimore Hotel)

*Names in bold indicate Presenter

Jaclene Begley, New York University

Since their peak in 2006, there have been severe housing price declines across the country, with average home prices falling by nearly one-third. The fallout from the housing crisis is especially salient for the growing number of older adults in the United States, who are more likely to be homeowners, typically have accumulated more housing equity than younger homeowners, and may also be nearing a time where they will need to draw upon these savings because they are retired or close to retirement and have restricted incomes. Thus, they may be both more exposed to the housing market, and more vulnerable financially to impact of the downturn. This financial hit not only has the potential to constrict the options and reduce spending for older homeowners, but also may limit the opportunities of the next generation, as older adults are forced to limit bequests and transfers of wealth. As a result, the next generation may be less able to purchase their own homes, make other critical investments, and to weather financial downturns.

This paper examines how bequests and wealth transfers across generations, both from older adults to younger adults and vice versa, have changed as a result of housing market fluctuations, with a specific focus on neighborhood-level variations in housing prices. Intergenerational transfers may have changed since the recession as households have a greater need to tap into their own equity, as parents and adult children both struggle with finances, home equity loans are less prevalent, or as housing becomes a less than ideal bequest.  Alternatively, households may be hesitant to downsize or liquidate after retirement or reductions in household size due to concern about maintaining bequest levels.

Recent literature on this topic shows evidence that bequest motives are quite prevalent and an important consideration when examining older adults and their behavioral responses to declines in housing wealth.  Many papers argue that older households would use their housing equity more if it were not for bequest motives (Keister and Moller 2000, Fisher et al 2007). However, there are few papers that examine the impact of neighborhood-level variation in prices and unexpected housing wealth declines on bequests and transfers to and from older generations.

This paper uses the PSID and HRS panel datasets, which both contain questions on bequests, trusts, and monetary transfers to and from children, along with housing values and mortgage information for each household and wave. These data have been matched with Zillow zip code- level housing price data, to examine neighborhood-level price changes. The identification exploits the disparate timing and impact of the housing market recession across the United States and within metropolitan areas to see if those households that lost or gained great amounts of housing wealth were more or less likely to transfer wealth or receive wealth transfers.  Intergenerational transfers are an important source of wealth for many Americans, and understanding the impact of neighborhood housing price declines on bequests and other wealth transfers is important for shaping current policy responses to homeownership and wealth building.