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

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  • Marjorie Flavin
  • Takashi Yamashita

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.

Suggested Citation

  • Marjorie Flavin & Takashi Yamashita, 1998. "Owner-Occupied Housing and the Composition of the Household Portfolio Over the Life-Cycle," NBER Working Papers 6389, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6389
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    Cited by:

    1. Ji, Tingting, 2004. "Consumer Credit Delinquency And Bankruptcy Forecasting Using Advanced Econometrc Modeling," MPRA Paper 3187, University Library of Munich, Germany.
    2. Perraudin, William R. M. & Sorensen, Bent E., 2000. "The demand for risky assets: Sample selection and household portfolios," Journal of Econometrics, Elsevier, vol. 97(1), pages 117-144, July.
    3. Fang Yang, 2005. "Consumption Along the Life Cycle: How Different is Housing?," 2005 Meeting Papers 718, Society for Economic Dynamics.
    4. Fuad Hasanov & Douglas Dacy, 2005. "Measuring and Analyzing Returns on Aggregate Residential Housing," Finance 0510005, University Library of Munich, Germany.
    5. LuisM. Viceira & John Y. Campbell, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March.
    6. 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 ysm372, Yale School of Management, revised 23 Jan 2006.
    7. Andrew Caplin & James H. Carr & Frederick Pollock & Zhong Yi Tong & Kheng Mei Tan & Trivikraman Thampy, 2007. "Shared‐equity mortgages, housing affordability, and homeownership," Housing Policy Debate, Taylor & Francis Journals, vol. 18(1), pages 209-242, January.
    8. Ji, Tingting, 2004. "Essays on consumer portfolio choice and credit risk," MPRA Paper 3161, University Library of Munich, Germany.
    9. Hochguertel, Stefan & van Soest, Arthur, 2001. "The Relation between Financial and Housing Wealth: Evidence from Dutch Households," Journal of Urban Economics, Elsevier, vol. 49(2), pages 374-403, March.
    10. Fuad Hasanov & Douglas C. Dacy, 2009. "Yet Another View on Why a Home Is One's Castle," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(1), pages 23-41, March.
    11. Carol C. Bertaut & Martha Starr-McCluer, 2000. "Household portfolios in the United States," Finance and Economics Discussion Series 2000-26, Board of Governors of the Federal Reserve System (U.S.).
    12. Boehm, Thomas P. & Schlottmann, Alan M., 2004. "The dynamics of race, income, and homeownership," Journal of Urban Economics, Elsevier, vol. 55(1), pages 113-130, January.
    13. Andersson, Björn, 2001. "Portfolio Allocation over the Life Cycle: Evidence from Swedish Household Data," Working Paper Series 2001:4, Uppsala University, Department of Economics.
    14. Joseph Nichols, 2004. "A Life-cycle Model with Housing, Portfolio Allocation, and Mortgage Financing," Econometric Society 2004 North American Winter Meetings 205, Econometric Society.
    15. Sebastian Barnes & Garry Young, 2003. "The rise in US household debt: assessing its causes and sustainability," Bank of England working papers 206, Bank of England.
    16. Laurent Gobillon & David Le Blanc, 2002. "L’impact des contraintes d’emprunt sur la mobilité résidentielle et les choix de statut d’occupation des ménages : un modèle simple de demande," Working Papers 2002-27, Center for Research in Economics and Statistics.
    17. Pace, R. Kelley & Zhu, Shuang, 2019. "The influence of house, seller, and locational factors on the probability of sale," Journal of Housing Economics, Elsevier, vol. 43(C), pages 72-82.

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    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G1 - Financial Economics - - General Financial Markets

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