Optimal Portfoliio Choice with Predictability in House Prices and Transaction Costs

91 Pages Posted: 23 Mar 2009 Last revised: 14 Dec 2011

See all articles by Stefano Corradin

Stefano Corradin

European Central Bank (ECB)

Jose L. Fillat

Federal Reserve Banks - Federal Reserve Bank of Boston

Carles Vergara-Alert

University of Navarra - IESE Business School

Date Written: December 13, 2011

Abstract

Are housing returns predictable? If so, do households take them into account when making their housing consumption and portfolio decisions? We document the existence of housing return predictability in the U.S. at the aggregate, census region, and state level. We study a portfolio choice model in which housing returns are predictable and adjustment costs must be paid when a house is purchased or sold. We show that two state variables aff ect the agent's decisions: (i) her wealth-to-housing ratio; and (ii) the time-varying expected growth rate of house prices. The agent buys (sells) her housing assets only when the wealth-to-housing ratio reaches an optimal upper (lower) bound. These bounds are time-varying and depend on the expected growth rate of house prices. Finally, we use household level data from the PSID and SIPP surveys to test and support the model's main implications.

Keywords: Portfolio Choice, Predictability, House Prices, Transaction Costs, Real Estate Bubbles

JEL Classification: G1, G11, C61, D11, R2, R20, R21

Suggested Citation

Corradin, Stefano and Fillat, Jose L. and Vergara-Alert, Carles, Optimal Portfoliio Choice with Predictability in House Prices and Transaction Costs (December 13, 2011). Available at SSRN: https://ssrn.com/abstract=1363898 or http://dx.doi.org/10.2139/ssrn.1363898

Stefano Corradin

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jose L. Fillat (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3342 (Phone)
617-5735445 (Fax)

HOME PAGE: http://www.bos.frb.org/economic/econbios/fillat.htm

Carles Vergara-Alert

University of Navarra - IESE Business School ( email )

Av. Pearson 21
Barcelona, 08034
Spain
+34 932544200 (Phone)
+34 932534343 (Fax)

HOME PAGE: http://web.iese.edu/cvergara/

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