Optimal Housing, Consumption, and Investment Decisions over the Life Cycle
AbstractWe derive explicit solutions to life-cycle utility maximization problems involving stock and bond investment, perishable consumption, and the rental and ownership of residential real estate. Prices of houses, stocks and bonds, and labor income are correlated. Because of a positive correlation between house prices and labor income, young individuals want little exposure to house price risk and tend to rent their home. Later in life the desired housing investment increases and will eventually reach and exceed the desired consumption, suggesting that the individual should buy his home--and either additional housing units (for renting out) or house price-linked financial assets. In the final years, preferences shift back to home rental. The derived strategies are still useful if housing positions are only reset infrequently. Our results suggest that markets for real estate investment trusts or other house price-linked contracts lead to nonnegligible welfare gains. This paper was accepted by Wei Xiong, finance.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 57 (2011)
Issue (Month): 6 (June)
housing; labor income; portfolio choice; life-cycle decisions; REITs;
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- Zeng, Yan & Wu, Huiling & Lai, Yongzeng, 2013. "Optimal investment and consumption strategies with state-dependent utility functions and uncertain time-horizon," Economic Modelling, Elsevier, vol. 33(C), pages 462-470.
- Marekwica, Marcel & Schaefer, Alexander & Sebastian, Steffen, 2013. "Life cycle asset allocation in the presence of housing and tax-deferred investing," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1110-1125.
- Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2012.
"Is Financial Fragility a Matter of Illiquidity? An Appraisal for Italian Households,"
CEIS Research Paper
242, Tor Vergata University, CEIS, revised 18 Jul 2012.
- Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2012. "Is financial fragility a matter of illiquidity? An appraisal for Italian households," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 12061, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
- Marekwica, Marcel & Stamos, Michael Z., 2010. "Optimal life cycle portfolio choice with housing market cycles," CFS Working Paper Series 2010/21, Center for Financial Studies (CFS).
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