Does Home Equity Substitute Long-term Care Purchases?
We test these hypotheses using the substantial variation in US house prices between 1990 and 2010 as well as across geographic regions. The variation was particularly pronounced during the run-up in prices from 2000 until 2008 and the subsequent correction. Home equity—the difference between a home’s market price and the sum of mortgages and any other home loans—tracked overall home prices closely.
We use data from the University of Michigan’s Health and Retirement Survey (HRS) and from the Federal Housing Finance Agency (FHFA). The HRS follows a large, representative sample of elderly persons over time and includes detailed income, asset, family, and health information from 1992 to 2010. Trends in reported home prices in the HRS are close to the prices available from government agencies —both across time and across geography—attesting to the representativeness of the HRS data. FHFA provides geographic house price indices. The HRS’ restricted geocode data allow us to match individual respondents to the metropolitan area of their residence; FHFA indices are available at the metropolitan area level.
The study’s contribution to the literature is twofold. First, while the portfolio choice among the elderly, including in relation to housing, has been studied extensively, this will be the first study, to our knowledge, that explicitly tests the impact of housing equity on LTCI purchases. Second, we are able to provide a causal estimate by using house prices at the metropolitan area as an instrument for home equity. We employ the two-stage least squares (TSLS) technique and capture state-level characteristics and time trends using state and year fixed effects. The availability of data on Medicare usage, renting a residence (as opposed to owning) and employer-provided insurance allows us to perform robustness checks using alternative specifications.
The study is significant from a policy perspective. The LTCI market is relatively small, with 10-15% of the total elderly holding it at a time. Nonetheless, health shocks during old age can be financially devastating for those who do not have LTCI or an alternative source of coverage. The relationship between LTCI and home equity is particularly relevant for the elderly because they are more likely to be homeowners than younger Americans and closer to requiring long-term care.