Housing Habits and Their Implications for Life-Cycle Consumption and Investment

Abstract

We solve a rich life-cycle model of household decisions involving consumption of perishable goods and housing services, habit formation for housing consumption, stochastic labor income, stochastic house prices, home renting and owning, stock investments, and portfolio constraints. In line with empirical observations, the optimal decisions involve (i) stock investments that are low or zero for many young agents and then gradually increasing over life, (ii) an age- and wealth-dependent housing expenditure share, (iii) non-housing consumption being significantly more sensitive to wealth and income shocks than housing consumption, and (iv) non-housing consumption being hump-shaped over life.

Keywords: Habit Formation, Life-Cycle Household Decisions, Housing Expenditure Share, Consumption Hump, Stock Market Participation, Renting vs. Owning Home, Human Capital

JEL Classification: G10, D14, D91, E21, R21