Advanced Search
MyIDEAS: Login to save this paper or follow this series

Owner-Occupied Housing and the Composition of the Household Portfolio Over the Life-Cycle

Contents:

Author Info

  • Marjorie Flavin
  • Takashi Yamashita
Registered author(s):

    Abstract

    This paper studies the impact of the portfolio constraint imposed by the consumption demand for housing (the 'housing constraint') on the household's optimal holdings of financial assets. Since the ratio of housing to net worth declines as the household accumulates wealth, the housing constraint induces a life-cycle pattern in the portfolio shares of stocks and bonds. For reasonable degrees of risk aversion, the changes in portfolio composition over the life-cycle can be dramatic. For example, for a coefficient of relative risk aversion of 3, the ratio of stocks to net worth in the optimal portfolio is .09 for the youngest households (ages 18-30) and .60 for the oldest (age 70 and over). Using data from the PSID on home values to construct household level panel data on the real after-tax return to owner-occupied housing, as well as data on the returns to financial assets, the paper estimates the vector of expected returns and the covariance matrix for the set of assets consisting of housing, mortgages, stocks, Treasury bonds, and T-bills. Numerical methods are used to calculate the mean-variance efficient frontier, conditional on different values of the housing constraint, and the optimal portfolios associated with different levels of relative risk aversion.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nber.org/papers/w6389.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6389.

    as in new window
    Length:
    Date of creation: Jan 1998
    Date of revision:
    Publication status: published as Flavin, Majorie and Takashi Yamashita. "Owner-Occupied Housing And The Composition Of The Household Portfolio," American Economic Review, 2002, v92(1,Mar), 345-362.
    Handle: RePEc:nbr:nberwo:6389

    Note: EFG
    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Joyce Manchester, 1989. "The Baby Boom, Housing and Loanable Funds," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 22(1), pages 128-49, February.
    2. James M. Poterba & Andrew A. Samwick, 1997. "Household Portfolio Allocation Over the Life Cycle," NBER Working Papers 6185, National Bureau of Economic Research, Inc.
    3. William N. Goetzmann & Roger G. Ibbotson, 1990. "The Performance Of Real Estate As An Asset Class," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 3(1), pages 65-76.
    4. Jonathan Skinner, 1991. "Housing and Saving in the United States," NBER Working Papers 3874, National Bureau of Economic Research, Inc.
    5. Ross, Stephen A & Zisler, Randall C, 1991. "Risk and Return in Real Estate," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 4(2), pages 175-90, June.
    6. Blake, David, 1996. "Efficiency, Risk Aversion and Portfolio Insurance: An Analysis of Financial Asset Portfolios Held by Investors in the United Kingdom," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(438), pages 1175-92, September.
    7. N. Gregory Mankiw & David N. Weil, 1988. "The Baby Boom, The Baby Bust, and the Housing Market," NBER Working Papers 2794, National Bureau of Economic Research, Inc.
    8. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, American Economic Association, vol. 65(5), pages 900-922, December.
    9. S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 18-80, Wharton School Rodney L. White Center for Financial Research.
    10. Mervyn A. King & Jonathan I. Leape, 1987. "Asset Accumulation, Information, and the Life Cycle," NBER Working Papers 2392, National Bureau of Economic Research, Inc.
    11. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
    12. Brueckner, Jan K, 1997. "Consumption and Investment Motives and the Portfolio Choices of Homeowners," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 15(2), pages 159-80, October.
    13. Robert S. Pindyck, 1986. "Risk Aversion and Determinants of Stock Market Behavior," NBER Working Papers 1921, National Bureau of Economic Research, Inc.
    14. Summers, Lawrence H, 1981. "Inflation, the Stock Market, and Owner-Occupied Housing," American Economic Review, American Economic Association, American Economic Association, vol. 71(2), pages 429-34, May.
    15. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 537-79, May.
    16. John L. Goodman, Jr. & John B. Ittner, 1993. "The accuracy of home owners' estimates of house value," Working Paper Series / Economic Activity Section, Board of Governors of the Federal Reserve System (U.S.) 131, Board of Governors of the Federal Reserve System (U.S.).
    17. Engelhardt, Gary V., 1996. "House prices and home owner saving behavior," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 26(3-4), pages 313-336, June.
    18. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, American Economic Association, vol. 69(3), pages 308-17, June.
    19. Sharpe, William F, 1991. " Capital Asset Prices with and without Negative Holdings," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 489-509, June.
    20. Zvi Bodie & Robert C. Merton & William F. Samuelson, 1992. "Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model," NBER Working Papers 3954, National Bureau of Economic Research, Inc.
    21. Goetzmann, W.N., 1990. "The Single Family Home In The Investment Portfolio," Papers, Columbia - Graduate School of Business fb-_90-15, Columbia - Graduate School of Business.
    22. Hilary W. Hoynes & Daniel L. McFadden, 1996. "The Impact of Demographics on Housing and Nonhousing Wealth in the United States," NBER Chapters, National Bureau of Economic Research, Inc, in: The Economic Effects of Aging in the United States and Japan, pages 153-194 National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Carol Bertaut & Martha Starr-McCluer, 2000. "Household portfolios in the United States," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-26, Board of Governors of the Federal Reserve System (U.S.).
    2. John Y. Campbell & Luis M. Viceira, 1998. "Who Should Buy Long-Term Bonds?," NBER Working Papers 6801, National Bureau of Economic Research, Inc.
    3. Andrew Caplin & William Goetzmann & Eric Hangen & Barry Nalebuff & Elisabeth Prentice & John Rodkin & Matthew Spiegel & Tom Skinner, 2003. "Home Equity Insurance: A Pilot Project," Yale School of Management Working Papers, Yale School of Management ysm372, Yale School of Management, revised 23 Jan 2006.
    4. Fang Yang, 2005. "Consumption Along the Life Cycle: How Different is Housing?," 2005 Meeting Papers, Society for Economic Dynamics 718, Society for Economic Dynamics.
    5. Ji, Tingting, 2004. "Consumer Credit Delinquency And Bankruptcy Forecasting Using Advanced Econometrc Modeling," MPRA Paper 3187, University Library of Munich, Germany.
    6. Joseph Nichols, 2004. "A Life-cycle Model with Housing, Portfolio Allocation, and Mortgage Financing," Econometric Society 2004 North American Winter Meetings, Econometric Society 205, Econometric Society.
    7. Perraudin, William R. M. & Sorensen, Bent E., 2000. "The demand for risky assets: Sample selection and household portfolios," Journal of Econometrics, Elsevier, Elsevier, vol. 97(1), pages 117-144, July.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:6389. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.