Life-Cycle Housing and Portfolio Choice with Bond Markets

Otto van Hemert (ovanheme@stern.nyu.edu)
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Otto van Hemert: NYU Stern

No 44, SIFR Research Report Series from Institute for Financial Research

Abstract: I study optimal housing and portfolio choice under stochastic inflation and real interest rates. Renters allocate financial wealth to stocks and bonds with different maturities. Homeowners also choose the mortgage type. I show that hedge demands and financial constraints vary over an investor's lifetime, giving rise to a pronounced life-cycle pattern in the optimal housing, stock, bond, and mortgage choice. Young homeowners take an adjustable-rate mortgage (ARM) and invest financial wealth predominantly in stocks. Later in the life cycle bonds play an important role, mainly as a hedge against changing real interest rates and house prices. Fairly risk-tolerant homeowners still prefer an ARM, while more risk-averse investors rather choose a combination of an ARM and a fixed-rate mortgage.

Keywords: Portfolio choice; mortgage; housing; term structure of interest rates (search for similar items in EconPapers)
JEL-codes: E43 G11 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2006-09-15
New Economics Papers: this item is included in nep-fin, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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