Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs

95 Pages Posted: 1 Dec 2010 Last revised: 15 Feb 2012

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

Multiple version iconThere are 4 versions of this paper

Date Written: December 2011

Abstract

Are housing prices predictable? If so, do households take into account it when making their portfolio choices? We document the existence of housing returns predictability in the US at the aggregate and regional level. We study a model, in which housing prices are predictable and adjustment costs must be paid when there is a housing transaction. We show that two state variables affect the agent's decisions: (i) his wealth-house ratio; and (ii) the time-varying expected growth rate of housing prices. The agent buys (sells) his 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 housing prices. Finally, we use household level data from the PSID and SIPP surveys to test and support the main implications of the model.

JEL Classification: E3

Suggested Citation

Corradin, Stefano and Fillat, Jose L. and Vergara-Alert, Carles, Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs (December 2011). 46th Annual AREUEA Conference Paper. Available at SSRN: https://ssrn.com/abstract=1717106 or http://dx.doi.org/10.2139/ssrn.1717106

Stefano Corradin

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jose L. Fillat

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 (Contact Author)

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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