Optimal Life Cycle Portfolio Choice with Housing Market Cycles

Marcel Fischer and Michael Z. Stamos

The Review of Financial Studies, 2013, vol. 26, issue 9, 2311-2352

Abstract: In recent decades U.S. households have experienced residential house prices moving persistently, that is, returns being positively serially correlated. We set up a realistically calibrated life cycle model with slow-moving time variation in expected housing returns, showing that not only age, labor income, and pre-existing housing wealth but also the state of the housing market significantly affect household decisions. Consistently with the data, the model predicts that in good states of housing market cycles (1) homeownership rates increase, (2) households buying homes invest a larger share of their net worth in their home, and (3) these households lever up more. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2013
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