Dynastic Home Equity

Using a nationally-representative panel of consumer credit records for the US from 1999 to 2021, we document a positive link between child and parent homeownership: children whose parents are homeowners are 1 percentage point (16%) more likely to be homeowners at age 25 relative to similar children whose parents do not own a house. We propose a new causal mechanism to explain this relationship based on parents extracting home equity to help finance their child’s home purchase. Using variation in leverage constraints as an instrument for parents’ equity extraction, we find that parents’ equity extraction raise the probability a child becoming a homeowner by five times. A back-of-the-envelope calculations suggest that dynastic home equity increases housing wealth inequality among young adults by 15%. Our results highlight the importance of familial wealth for household wealth accumulation.