Household Asset Portfolios and the Reform of the Housing Finance Market

ment planning decisions, including asset allocation choices, it is important for them to consider how all of the assets they own fit together to form an overall portfolio of household wealth. Surprisingly often, one of the most important household assets is left out of retirement planning discussions completely: the family home. This issue of Research Dialogues examines in detail the central role that residential housing plays in household asset portfolios in the United States. Currently, families don’t have much choice regard i n g the amount of wealth they must “allocate” to their home: either they own their residence or they do not. This stark choice generally leaves homeowners overexposed to significant financial risks that most would prefer not to take. The authors of this article describe financial innovations that, if developed and adopted, would provide families far greater choice regarding how much to invest in a home. The authors show that this greater flexibility could lead to as much as 20% greater wealth at retirement through better diversification of the wealth that homeowners currently must hold in the form of housing. This article was prepared for R e s e a r c h D i a l o g u e s by Andrew Caplin, professor, New York University Department of Economics; Sewin Chan, assistant professor, Rutgers University Department of Economics; Charles Freeman, vice president, Chase Manhattan Mortgage Company; and Joseph Tr a c y, senior economist, Federal Reserve Bank of New York. It summarizes many of the themes that are discussed in detail in their recent book, H o u s i n g P a r t n e r s h i p s ( 1 9 9 7 ) .