Who Buys High and Sells Low: Trading against Expected Returns and Wealth Inequality

Theories are ambiguous about whether households of higher or lower wealth consistently trade against expected returns. I employ unique matched data on US household trades in the housing market and their wealth to study trade timings and quantify the implications for portfolio returns and wealth inequality. I find that poorer households consistently buy houses when expected returns are low (e.g., after price increases) and sell when expected returns are high (e.g., after price declines). The estimated dispersion in expected portfolio returns from active trades is large, with an interquartile range across the wealth distribution of 65 basis points per year. Back-of-envelope calculations suggest this return dispersion could account for roughly one-fifth of observed wealth concentration beyond what income differences alone explain, within the interquartile range. (Copyright: Elsevier)