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Life-Cycle Housing and Portfolio Choice with Bond Markets

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  • van Hemert, Otto

    (NYU Stern)

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.

Suggested Citation

  • van Hemert, Otto, 2006. "Life-Cycle Housing and Portfolio Choice with Bond Markets," SIFR Research Report Series 44, Institute for Financial Research.
    • Handle: RePEc:hhs:sifrwp:0044
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    References listed on IDEAS

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    Cited by:

    1. Koijen, Ralph S.J. & Hemert, Otto Van & Nieuwerburgh, Stijn Van, 2009. "Mortgage timing," Journal of Financial Economics, Elsevier, vol. 93(2), pages 292-324, August.
    2. Koijen, R.S.J., 2008. "Essays on asset pricing," Other publications TiSEM 75662994-29dc-4a83-a3ff-9, Tilburg University, School of Economics and Management.
    3. Chen, Xi, 2018. "Optimal life cycle mortgage and portfolio choices in the presence of the affordability constraint," Journal of Housing Economics, Elsevier, vol. 39(C), pages 1-16.
    4. Sumit Agarwal & Brent W. Ambrose, 2008. "Does it pay to read your junk mail? evidence of the effect of advertising on home equity credit choices," Working Paper Series WP-08-09, Federal Reserve Bank of Chicago.

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    More about this item

    Keywords

    Portfolio choice; mortgage; housing; term structure of interest rates;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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