Owner-Occupied Housing: Life-Cycle Implications for the Household Portfolio

Marjorie A. Flavin · Takashi Yamashita

58 citations0/0 files storedAmerican Economic Review

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Financial Literacy, Pension, Retirement Analysis Housing Market and Economics Economic theories and models

Abstract

The paper constructs a model of optimal portfolio allocation incorporating the role of housing as collateral. Current house value is a state variable in the portfolio decision due to a nonconvex adjustment cost. Holding risk aversion constant, the percentage of the portfolio held in stocks is decreasing in the ratio of house value to net wealth; thus an older household with a lower ratio of house value to net wealth will generally hold more its portfolio in stocks than younger households. Empirical results using the Survey of Consumer Finances confirm the quantitative and statistical significance of the housing state variable.

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2019American Economic Review 1988The Efficiency of the Market for Single-Family Homes 2004Liquidity Constraints, Household Wealth, and Entrepreneurship 2002Limited Asset Market Participation and the Elasticity of Intertemporal Substitution 2004Portfolio Choice in the Presence of Housing 2002Owner-Occupied Housing and the Composition of the Household Portfolio 2005Optimal life cycle asset allocation : understanding the empirical evidence 2004Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints

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