Cash-out refinancing and household portfolio releveraging

This paper shows that mortgage-based equity extraction meaningfully reshapes household portfolios. Using data from the Panel Study of Income Dynamics (PSID) from 2001 to 2011, I find that equity-extracting households are more likely to increase consumption, consistent with the collateral role of housing wealth. Beyond this channel, the results reveal a portfolio-releveraging mechanism: households direct a substantial share of withdrawn equity into additional real estate purchases rather than into financial assets. This behaviour raises leverage and concentrates housing risk, offering a household-level explanation for the sharp deterioration of balance sheets when housing market conditions weakened.