Research Summary
Research Summary
Optimal Portfolios with Housing Derivatives
Description
Households that contemplate moving to different cities or trading up or down in the fu-ture are exposed to substantial housing risk. In order to mitigate this risk, I derive the op-timal portfolios using housing futures. In addition to the optimum growth portfolio, households hedge housing both as an investment and as consumption. Housing invest-ment risk is hedged by selling housing futures amounting to the full value of the home. Housing consumption risk is hedged by buying housing futures in each city where the household might move. The size of the hedges depends on the probability of moving, on home values, and on labor income in each region. The hedging demands offset each other when the household intends to live in the same home indefinitely. Furthermore, the rent versus buy decision can be made without any information about expected home price ap-preciation, risk premia, or utility functions.