Housing and Wealth Portfolios

The household's decision to invest in a home is complicated by the fact that owner-occupied housing plays a dual role as both a physical good generating housing services, and as a component of the wealth portfolio. For many homeowners, housing represents both the largest single element of the monthly expenditure, and the most important asset in the wealth portfolio. Given the availability of rental markets for houses, a family could, in principle, independently choose its desired level of consumption of housing services and its desired holdings of residential real estate as an asset; for example renting a 2,500 square foot single family house for its own use, and at the same time owning and renting out a 1,000 square foot condo. However, using rental markets in order to separate the consumption decision (the quantity of housing services consumed) from the investment decision (the quantity of residential real estate held as an asset) would require the household to engage in the landlord/tenant relationship (once and a landlord and once as a tenant) on both houses. Understandably, the vast majority of homeowners avoid the double landlord/tenant roles by choosing a single residential property, which then simultaneously determines the family's level of consumption of housing services, and the quantity of real estate in the portfolio. We consider the role of owner-occupied housing in the asset portfolio, assuming that the household owner-occupies a particular house, and thus the