Essays on annuitization and housing choice

Chapter 1 For most US households, labor income is the most important source of wealth and housing is the most important risky asset. A natural intuition is thus that households whose incomes covary relatively strongly with housing prices should own relatively little housing. Under plausible assumptions on preferences and distributions, this result holds theoretically. Empirically, I find a significant effect: among US households, a one standard deviation increase in income-house price covariance is associated with a decrease of approximately $25,000 in the value of owner occupied housing. This empirical result implies greater cognizance of the interaction between labor income and asset risk on the part of households than suggested by most analyses of stock market behavior. The analysis also suggests that many homeowners enter financial markets in a riskier position than typically thought, and reinforces the intuitive appeal of proposals for market- or tax-based risk sharing in housing prices. Chapter 2 extends the theory of annuitization with no bequest motive in two directions. First, we derive sufficient conditions, in a more general setting than Yaari (1965), under which complete annuitization is optimal, and weaker conditions under which partial annuitization is better than zero annuitization. Second, we explore how incremental and complete annuitization affect consumer welfare in these more general conditions. When markets are complete, all savings are optimally annuitized as long as there is no bequest motive and annuitized assets have greater returns than conventional assets.