Research

Abstract: Reverse Mortgages (RMs) enable eligible homeowners 62 years and older access to the liquidity of their home without them moving out or repaying before loan termination when the borrowers die or move to long-term care facilities. We incorporate RMs into a quantitative equilibrium life-cycle model to assess their impacts on household decisions, the mortgage, and the housing market. We show that the volatility of consumption growth decreases for RM borrowers. Additionally, introducing RMs enhances the house's perceived value to households, making homeownership a more financially attractive option and stimulating housing demand. These effects increase overall household welfare in our model, highlighting the positive impact of RMs.

Abstract: This paper uncovers the nonlinear relationship between earning risk and stock returns, as measured by the between-squares correlation. By incorporating this between-squares correlation into a life-cycle model, we demonstrate that it lowers households' participation rate and generates moderate risky asset holdings. We identify two pathways through which the between-squares correlation affects portfolio choices: the skewness and kurtosis channels. The extent to which these channels dominate each other depends on the level of between-squares correlation, leading to a nonlinear relationship between this variable and household decisions. Our empirical studies support the model's predictions. Moreover, we find that ignoring between-squares correlations leads to substantial welfare loss and contributes to increasing wealth inequality.

Abstract: Should a household buy a home? Using data from 16 developed countries spanning 1870 to 2020, this study provides an affirmative answer through the analysis of homeownership's economic benefits. Contrary to popular expert advice, homeowners realize lifetime wealth gains of up to 9% and welfare improvements of up to 22%, relative to renters who solely invest in stocks. Homeownership lowers the downside risk of wealth portfolio and enhances wealth equality. However, these benefits come at the expense of lower working-life wealth and reduced financial asset holdings. We also observe much heterogeneity: Less wealthy households financing for homeownership realize smaller wealth gains, while buying during moderately low interest rates maximizes the benefits. Overall, low (high) income homeowners benefit more from welfare (wealth) relative to high (low) income homeowners.