Why Do Homeowners Invest the Bulk of their Wealth in their Home?

Despite the well-known benefits of diversification, homeowners invest mostly in their home. A common explanation for this pattern is that homeowners are constrained to fully own the home they want to live in. We refute this explanation and show that the predominance of housing stems from its distinct investment value. We then provide clarity on the value of the housing investment. Because owning a home provides a steady stream of housing consumption, it is equivalent to purchasing a perpetual bond indexed to that home. Housing thus plays a special role in the portfolio as one of the homeowner’s risk-free assets.