Housing Returns and Restrictions on Diversification

Abstract

Residential single-family housing dominates the portfolio of the representative household. Most homeowners are neither diversified by asset type nor by geographic market The same households that hold only one house are typically diversified in other financial markets, notably with the shifting of many investment assets to mutual funds. Information on the nature of household portfolios is provided, along with the extent of the cost in either greater risk or lower returns of an overly concentrated portfolio. The low correlations between single family housing markets implies a significant benefit from diversification across markets. Yet, most households are constrained from such diversification, resulting in either higher risk or lower return on personal portfolios.