Housing as an asset in portfolio decisions

This dissertation explores the effects of residential real estate investment on the household's portfolio allocation decisions. Chapter 1 surveys the recent literature on life-cycle saving and portfolio choice with special reference to the role of housing. Chapter 2 develops a model in which the household chooses to hold a mean-variance efficient portfolio inclusive of housing. Chapter 3 tests the implication of the model developed in Chapter 2.;The home is often the single most important asset in the family's portfolio. Despite its size and apparent importance, past studies of asset allocation have generally ignored the role of housing. one possible reason is that because a house is simultaneously an investment good and a consumption good, an increase in house prices usually implies an increase in future prices of housing services. Hence the effect of house price changes on the household's real wealth level is not clearly understood. Chapter 1 summarizes the treatment of housing in the literature from this point of view.;Chapter 2 develops a model of asset allocation in which economic agents care about the risk and return of their total portfolio inclusive of housing. This result is obtained by assuming zero correlation between returns on financial assets and housing. Because the decision of how much housing to hold is also based on the consumption demand for housing services, the ratio of house value to net worth changes dramatically over time. Optimal portfolios are computed numerically conditional on different values of the house-to-net worth ratio. By doing so, we demonstrate that financial asset holdings exhibit a life-cycle pattern similar to that observed in the data.;Chapter 3 presents an econometric study of stockholding behavior. An extension of the estimation method to correct for sample-selection bias is introduced to take into account the correlation between the decision to own a home and the decision to hold stocks. The empirical estimation results show that the apparent hump-shaped age profile of stockholdings may be attributable to the changes in the house-to-net worth ratio, as implied by the model in Chapter 2.