Housing Ownership Decision Making in the Framework of Household Portfolio Choice
Eli Beracha (),
Alexandre Skiba () and
Ken H Johnson ()
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Eli Beracha: Florida International University
Alexandre Skiba: University of Wyoming
Ken H Johnson: Florida Atlantic University
Journal of Real Estate Research, 2017, vol. 39, issue 2, 263_288
While it is well documented that homeowners, on average, have greater total wealth than renters, it is not clear that homeownership is one of the main causes for this wealth differential. A recent study by Beracha and Johnson (2012) shows that, historically, renting creates greater wealth than owning a home when a fair comparison is conducted. Thus, it is possible that homeowners are wealthier than renters not because of homeownership, but rather in spite of it. A notable and major drawback with Beracha and Johnson's study, however, is that it considers the wealth created from homeownership in isolation rather than as a part of a household's total portfolio. One of the first lessons of finance (and asset allocation, in particular), however, is that we should care about the overall portfolio performance rather than the performance of an individual asset class within the portfolio. This manuscript addresses this drawback and considers the buy versus rent decision in the framework of household portfolio choice. This allows us to determine whether owning a home increases the utility of households by improving the performance of their portfolio compared with households that rent. We determine that while renting is superior to ownership in isolation, homeownership as a part of the household portfolio improves wealth creation on a risk-adjusted basis in many scenarios. The homeownership scenarios that improve portfolio performance, however, suggest significant policy changes that currently favor levered homeownership strategies for households with minimal wealth.
JEL-codes: L85 (search for similar items in EconPapers)
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