Abstract

http://ssrn.com/abstract=687162
 
 

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Homeownership as a Constraint on Asset Allocation


Stephen Day Cauley


University of California, Los Angeles (UCLA) - Finance Area

Andrey D. Pavlov


Simon Fraser University (SFU) - Finance Area

Eduardo S. Schwartz


University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER); Centre for International Finance and Regulation (CIFR)

March 2005


Abstract:     
Personal preferences and financial incentives make homeownership desirable for most families. Once a home is purchased they find it impractical (costly) to frequently change their ownership of residential real estate. Thus, by deciding how much home to buy, a family constrains their ability to adjust their asset allocation between residential real estate and other assets. To analyze the impact of this constraint on consumption, welfare, and post-retirement wealth, we first investigate a representative individual's optimal asset allocation decisions when they are subject to a "homeownership constraint." Next, we perform a "thought experiment" where we assume the existence of a market where a homeowner can sell, without cost, a fractional interest in their home. Now the housing choice decision does not constrain the individual's asset allocations. By comparing these two cases, we estimate the differences in post-retirement wealth and the welfare gains potentially realizable if asset allocations were not subject to a homeownership constraint. For realistic parameter values, we find that a representative homeowner would require between a 2 and 25 percent increase in total net worth to achieve the same level of utility as would be achievable if the choice of a home could be separated from the asset allocation decision.

Number of Pages in PDF File: 42

Keywords: Asset allocation, housing

JEL Classification: G12

working papers series


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Date posted: March 22, 2005  

Suggested Citation

Cauley , Stephen Day and Pavlov, Andrey D. and Schwartz, Eduardo S., Homeownership as a Constraint on Asset Allocation (March 2005). Available at SSRN: http://ssrn.com/abstract=687162 or http://dx.doi.org/10.2139/ssrn.687162

Contact Information

Stephen Day Cauley
University of California, Los Angeles (UCLA) - Finance Area ( email )
Los Angeles, CA 90095-1481
United States
310-825-1131 (Phone)
310-825-9528 (Fax)
Andrey D. Pavlov
Simon Fraser University (SFU) - Finance Area ( email )
Burnaby, British Columbia V5A 1S6
Canada
604 291 5835 (Phone)
604 291 4920 (Fax)
Eduardo S. Schwartz (Contact Author)
University of California, Los Angeles (UCLA) - Finance Area ( email )
Los Angeles, CA 90095-1481
United States
310-825-1953 (Phone)
310-206-5455 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for International Finance and Regulation (CIFR) ( email )
Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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References:  30
Citations:  11

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