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Life-Cycle Housing and Portfolio Choice with Bond Markets

Author

Listed:
  • van Hemert, Otto

    (NYU Stern)

Abstract

I study optimal housing and portfolio choice under stochastic inflation and real interest rates. Renters allocate financial wealth to stocks and bonds with different maturities. Homeowners also choose the mortgage type. I show that hedge demands and financial constraints vary over an investor's lifetime, giving rise to a pronounced life-cycle pattern in the optimal housing, stock, bond, and mortgage choice. Young homeowners take an adjustable-rate mortgage (ARM) and invest financial wealth predominantly in stocks. Later in the life cycle bonds play an important role, mainly as a hedge against changing real interest rates and house prices. Fairly risk-tolerant homeowners still prefer an ARM, while more risk-averse investors rather choose a combination of an ARM and a fixed-rate mortgage.

Suggested Citation

  • van Hemert, Otto, 2006. "Life-Cycle Housing and Portfolio Choice with Bond Markets," SIFR Research Report Series 44, Institute for Financial Research.
    • Handle: RePEc:hhs:sifrwp:0044
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    References listed on IDEAS

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    Cited by:

    1. Koijen, R.S.J., 2008. "Essays on asset pricing," Other publications TiSEM 75662994-29dc-4a83-a3ff-9, Tilburg University, School of Economics and Management.
    2. Sumit Agarwal & Brent W. Ambrose, 2008. "Does it pay to read your junk mail? evidence of the effect of advertising on home equity credit choices," Working Paper Series WP-08-09, Federal Reserve Bank of Chicago.
    3. Koijen, Ralph S.J. & Hemert, Otto Van & Nieuwerburgh, Stijn Van, 2009. "Mortgage timing," Journal of Financial Economics, Elsevier, vol. 93(2), pages 292-324, August.
    4. Chen, Xi, 2018. "Optimal life cycle mortgage and portfolio choices in the presence of the affordability constraint," Journal of Housing Economics, Elsevier, vol. 39(C), pages 1-16.

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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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