Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs

96 Pages Posted: 8 Jun 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: February 7, 2012

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 affect the agent's decisions: 1) her wealth-to-housing ratio; and 2) 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, household finance

Suggested Citation

Corradin, Stefano and Fillat, Jose L. and Vergara-Alert, Carles, Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs (February 7, 2012). IESE Business School Working Paper No. 948. Available at SSRN: https://ssrn.com/abstract=2079576 or http://dx.doi.org/10.2139/ssrn.2079576

Stefano Corradin (Contact Author)

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

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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