NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Marjorie Flavin, Takashi Yamashita

NBER Working Paper No. 6389
Issued in January 1998
NBER Program(s):   EFG

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.

download in pdf format
   (1922 K)

email paper

This paper is available as PDF (1922 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6389

Published: Flavin, Majorie and Takashi Yamashita. "Owner-Occupied Housing And The Composition Of The Household Portfolio," American Economic Review, 2002, v92(1,Mar), 345-362.

Users who downloaded this paper also downloaded these:
Poterba and Samwick w6185 Household Portfolio Allocation Over the Life Cycle
Sinai and Souleles w9462 Owner-Occupied Housing as a Hedge Against Rent Risk
Vissing-Jorgensen w8884 Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures
Case, Shiller, and Quigley w8606 Comparing Wealth Effects: The Stock Market Versus the Housing Market
Grossman and laroque w2369 Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us