Financial Sophistication and Housing Leverage Among Older Households

Hyrum L. Smith, Michael S. Finke, Sandra J. Huston

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

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.

Original languageEnglish
Pages (from-to)315-327
Number of pages13
JournalJournal of Family and Economic Issues
Volume33
Issue number3
DOIs
StatePublished - Sep 2012

Keywords

  • Debt
  • Financial sophistication
  • Leverage
  • Mortgage
  • Older

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