Optimal portfolio choice with predictability in house prices and transaction costs

Stefano Corradin (), Jose Fillat and Carles Vergara-Alert

No D/948, IESE Research Papers from IESE Business School

Abstract: Are housing returns predictable? If so, do households take them into account when making their housing consumption and portfolio decisions? We document the existence of housing return predictability in the U.S. at the aggregate, census region, and state level. We study a portfolio choice model in which housing returns are predictable and adjustment costs must be paid when a house is purchased or sold. We show that two state variables affect the agent's decisions: 1) her wealth-to-housing ratio; and 2) the time-varying expected growth rate of house prices. The agent buys (sells) her housing assets only when the wealth-to-housing ratio reaches an optimal upper (lower) bound. These bounds are time-varying and depend on the expected growth rate of house prices. Finally, we use household level data from the PSID and SIPP surveys to test and support the model's main implications.

Keywords: Portfolio choice; predictability; house prices; household finance (search for similar items in EconPapers)
Pages: 96 pages
Date: 2012-02-03
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs (2014)
Working Paper: Optimal portfolio choice with predictability in house prices and transaction costs (2012)
Working Paper: Optimal portfolio choice with predictability in house prices and transaction costs (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:iesewp:d-0948

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