Optimal Life Cycle Portfolio Choice with Housing Market Cycles

Marcel Fischer, Michael Z. Stamos

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

In recent decades U.S. households have experienced residential house prices moving persistently, that is, returns being positively serially correlated. We set up a realistically calibrated life cycle model with slow-moving time variation in expected housing returns, showing that not only age, labor income, and pre-existing housing wealth but also the state of the housing market significantly affect household decisions. Consistently with the data, the model predicts that in good states of housing market cycles (1) homeownership rates increase, (2) households buying homes invest a larger share of their net worth in their home, and (3) these households lever up more.
Original languageEnglish
JournalReview of Financial Studies
Volume26
Issue number9
Pages (from-to)2311-2352
ISSN0893-9454
DOIs
Publication statusPublished - Sep 2013

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