Optimal Life Cycle Portfolio Choice with Housing Market Cycles
Review of Financial Studies 26(9), 2311-2352
56 Pages Posted: 21 Nov 2010 Last revised: 12 Aug 2013
Date Written: February 2013
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.
Keywords: asset allocation, portfolio choice, housing market cycles, real estate
JEL Classification: G11, D91
Suggested Citation: Suggested Citation