The Collateral Value of Housing: Evidence from Servicemember Pension Choice

Abstract

We evaluate the effect of house prices on U.S. military servicemember pension choices. In our setting the wealth channel – an increase in house prices increases household wealth and both current and future consumption – and the collateral channel – an increase in house prices enables the household to borrow more using housing collateral – have contrasting predictions about servicemember choices. Using state-level land supply inelasticity as an instrument for house price changes, we find that consistent with the collateral channel (and inconsistent with the wealth channel) servicemembers from states that experience house price increases are less likely to choose the pension option that provides immediate liquidity at the expense of long-term benefits. A one standard deviation increase in house prices translates into a reduction in the servicemember's implied discount rate from 8% (the average borrowing rate against future pension in our sample) to 6.3%.

Keywords: personal discount rate, time variation, macroeconomic variables, borrowing constraint, house price, collateral, housing, military pension

JEL Classification: D14, D91