Dynastic Home Equity
Matteo Benetton, Marianna Kudlyak, and John Mondragon, FRB SF Working Paper No. 2022-13.
Abstract. Using a nationally-representative panel of consumer credit records for the US from 1999 to 2021, we document a positive correlation between child and parent homeownership. We propose a new mechanism behind this relationship -- parents extract home equity to help finance their child's home purchase -- and we quantify it using fixed effect, event study, local projection, and instrumental variable methods. We find that children whose parents extract equity: (i) are 60-80% more likely to become homeowners; (ii) have lower leverage at origination; and (iii) buy higher-valued homes and at a younger age. The effects are stronger when housing affordability is worse and children's financial constraints are more likely to bind. Dynastic home equity alone accounts for 20% of the decline in new homeownership for children of low-equity parents following the Global Financial Crisis and 5-10% of the homeownership gap between black and white young adults.Â
Paper in Working Paper series: FRBSF, Hoover Institution, CEPR, IZA, SSRN