Owner-Occupied Housing and the Composition of the Household Portfolio Over the Life-Cycle

56 Pages Posted: 19 Jul 2000 Last revised: 18 Dec 2022

See all articles by Marjorie Flavin

Marjorie Flavin

University of California at San Diego; National Bureau of Economic Research (NBER)

Takashi Yamashita

University of California, San Diego (UCSD) - Department of Economics

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Date Written: January 1998

Abstract

This paper studies the impact of the portfolio constraint imposed by the consumption demand for housing (the 'housing constraint') on the household's optimal holdings of financial assets. Since the ratio of housing to net worth declines as the household accumulates wealth, the housing constraint induces a life-cycle pattern in the portfolio shares of stocks and bonds. For reasonable degrees of risk aversion, the changes in portfolio composition over the life-cycle can be dramatic. For example, for a coefficient of relative risk aversion of 3, the ratio of stocks to net worth in the optimal portfolio is .09 for the youngest households (ages 18-30) and .60 for the oldest (age 70 and over). Using data from the PSID on home values to construct household level panel data on the real after-tax return to owner-occupied housing, as well as data on the returns to financial assets, the paper estimates the vector of expected returns and the covariance matrix for the set of assets consisting of housing, mortgages, stocks, Treasury bonds, and T-bills. Numerical methods are used to calculate the mean-variance efficient frontier, conditional on different values of the housing constraint, and the optimal portfolios associated with different levels of relative risk aversion.

Suggested Citation

Flavin, Marjorie and Yamashita, Takashi, Owner-Occupied Housing and the Composition of the Household Portfolio Over the Life-Cycle (January 1998). NBER Working Paper No. w6389, Available at SSRN: https://ssrn.com/abstract=226137

Marjorie Flavin (Contact Author)

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Takashi Yamashita

University of California, San Diego (UCSD) - Department of Economics ( email )

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La Jolla, CA 92093-0508
United States