Title: Local Housing Returns and the Optimal Portfolios of Consumption Constrained Households Speaker: Dr. FENG Guoliang，George Washington University Host: Shihe Fu, Professor, RIEM Time: 10 am-11:30am, Jan. 8, 2016, Friday Venue: 1211 Gezhi Hall Abstract: Homeowners tend to hold housing and risk-free assets, but not equities or bonds, in their personal portfolios. This has been called the stockholding paradox and has been explained by observing that the correlation between the rate of appreciation of national housing prices and returns to the S&P 500 is relatively high. The conclusion has been that homeowners derive only modest diversification benefits from holding stocks and choose instead to amortize their mortgages. In contrast to the empirical literature on the stockholding paradox, Brueckner (1997) has demonstrated the theoretical proposition that consumption constrained households, those whose wealth is a fraction of housing value, will not find holding the market portfolio efficient. This research proceeds from Brueckner’s observation. First, total return to homeownership, including both appreciation and implicit rent is measured. Second, properties of optimal portfolios for households under various degrees of consumption constraints are identified. Third, optimal portfolios of individual stocks are determined. The results show that portfolios of individual stocks, which vary by city, are far more attractive than the market portfolio for homeowners. This suggests a resolution to the stockholding puzzle. Homeowners could benefit from holding portfolios designed to offset the unique risk of the cities where they live but they lack information on what these portfolios might be. Given this information gap, holding the market portfolio is not particularly attractive for most homeowners. About the speaker: Feng Guoliang obtained his Ph.D. degree in economics at George Washington University. He is an economics consultant for the World Bank. His research fields are Risk Management, Household Finance, and Real Estate Finance.