Owner-Occupied Housing and the Composition of the Household Portfolio

For most homeowners, the house is the single most important consumption good appearing as an argument of the utility function, and, at the same time, the dominant asset in the portfolio. This paper uses a mean-variance efficiency framework to examine the household’s optimal portfolio problem when owner-occupied housing is included in the list of available assets. Housing differs from stocks and bonds in a crucial way: since the household’s ownership of residential real estate determines the level of its consumption of housing services, the household’s demand for real estate is “overdetermined” in the sense that the level of real estate ownership which is optimal from the point of view of the consumption of…