Housing, portfolio choice and the macroeconomy

This paper investigates the properties of the wealth distribution and the portfolio composition regarding housing and equity holdings, and their relationship to macroeconomic shocks. To this end, I construct a business cycle model in which agents differ in age, income and wealth. Housing provides shelter services and serves as collateral for loans. The model is consistent with several facts such as the life-cycle pattern of housing-to-wealth ratios, the larger degree of concentration for non-housing wealth, the smaller weight of housing in richer households' portfolios as well as the larger housing-to-wealth ratios in recessions. In addition, the model shows that while relaxing the collateral constraint does not impact the business cycle dynamics for the entire economy, it significantly alters the behavior of residential and business investment for the younger and poorer fraction of the population. (c) 2006 Elsevier B.V. All rights reserved.