How House Price Dynamics and Credit Constraints affect the Equity Extraction of Senior Homeowners

Households can borrow against equity through different channels, including home equity lines of credit (HELOCs), second liens, cash-out refinancing, and—for senior homeowners—reverse mortgages. We use data from the New York Federal Reserve/Equifax Consumer Credit Panel, the U.S. Department of Housing and Urban Development, and other sources to jointly estimate the decision to extract equity through these different channels. Specifically, we identify the influence of credit constraints, house price dynamics, and their interactions on the proportion of seniors in a ZIP code extracting through a given channel each year from 2004 to 2012: the boom and bust period in the U.S. housing market. Prior research finds credit constrained households were more responsive to house price gains than nonconstrained households. Our results suggest that this response varies depending on the borrowing channel. As house prices increased, cash-out refinancing increased in credit-constrained areas, but HELOCs increased in less-credit-constrained areas. Further, when house prices fell, reverse mortgage originations increased—particularly in credit-constrained areas. We also observe differential responses to credit constraints and house price changes in minority versus non-minority neighborhoods.