Why Do Homeowners Invest the Bulk of their Wealth in their Home?
76 Pages Posted: 7 May 2016 Last revised: 20 Mar 2020
Date Written: March 18, 2020
Despite the well-known beneﬁts of diversiﬁcation, homeowners invest mostly in their home. A common explanation for this pattern is that homeowners are constrained to fully own the home they want to live in. We refute this explanation and show that the predominance of housing stems from its distinct investment value. We then provide clarity on the value of the housing investment. Because owning a home provides a steady stream of housing consumption, it is equivalent to purchasing a perpetual bond indexed to that home. Housing thus plays a special role in the portfolio as one of the homeowner’s risk-free assets.
Keywords: Portfolio allocation, real estate, hedging
JEL Classification: G11, G12
Suggested Citation: Suggested Citation