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.
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.
LanguageEnglish
JournalReview of Financial Studies
Volume26
Issue number9
Pages2311-2352
ISSN0893-9454
DOIs
StatePublished - Sep 2013

Keywords

    Cite this

    Fischer, Marcel ; Stamos, Michael Z. . / Optimal Life Cycle Portfolio Choice with Housing Market Cycles. In: Review of Financial Studies. 2013 ; Vol. 26, No. 9. pp. 2311-2352
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    Optimal Life Cycle Portfolio Choice with Housing Market Cycles. / Fischer, Marcel; Stamos, Michael Z. .

    In: Review of Financial Studies, Vol. 26, No. 9, 09.2013, p. 2311-2352.

    Research output: Contribution to journalJournal articleResearchpeer-review

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    AU - Stamos,Michael Z.

    PY - 2013/9

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    AB - 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.

    KW - Portfolio Choice

    KW - Investment Decisions

    KW - Intertemporal Consumer Choice

    KW - Life Cycle Models and Saving

    U2 - 10.1093/rfs/hht010

    DO - 10.1093/rfs/hht010

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