Owner-Occupied Housing : The Role of Collateral Constraints on the Household Portfolio

The paper constructs a model of optimal portfolio allocation that focuses on the role of housing as collateral, allows for house price risk, and assumes that altering the quantity of housing incurs an adjustment cost. Because of the adjustment cost, the current house value becomes a state variable in the portfolio decision; the optimal portfolio depends on both the value of the housing state variable and the household's degree of relative risk aversion. Empirical results using the Survey of Consumer Finances support the model's implications regarding the effect of the housing state variable on the optimal portfolio of financial assets