April 28, 1999


The latest edition of the New York Fed’s Current Issues in Economics and Finance -- Are Stocks Overtaking Real Estate in Household Portfolios? -- is enclosed for your review.

Authors Joseph Tracy, Henry Schneider, and Sewin Chan argue that despite the rapid growth in the stock market, only ten percent of the population hold significant amounts of corporate equity, while the majority of households have two-thirds of their assets in housing.

The authors’ findings run counter to the view of household wealth suggested by the aggregate numbers in the Federal Reserve’s Flow of Funds Accounts. This source, which reports corporate equity and real estate holdings for the household sector as a whole, shows that equities in 1998 constituted a larger share of total household assets than did real estate.

Noting that the flow of funds figures are computed in a way that gives additional weight to the equity shares of wealthy households, the authors turn to the Federal Reserve’s Survey of Consumer Finances, last published in 1995. Using survey information on individual households, they evaluate the asset portfolio of a typical household--one that is positioned in the middle of the survey sample’s wealth distribution.

Tracy, Schneider, and Chan find that this typical household holds most of its assets in real estate and few, if any, assets in corporate equity. Although the authors lack very recent data, they offer persuasive evidence that most households’ equity and real estate ownership patterns are unlikely to have changed greatly over the past three years.

The concluding sections of the article explore the causes and consequences of households’ disproportionate investment in real estate. The authors find that:

  • The typical household’s high real estate share is attributable to the current system of mortgage finance, which effectively rules out limited investment in housing. The lack of alternative financing options means that households are compelled to commit most of their funds to the purchase of a house, leaving little capital for other kinds of investment.
  • The heavy investment in housing, the authors note, entails risk. The sheer magnitude of a house purchase, combined with the high leverage necessary to finance it, leaves a household exposed to income shocks and regional house price declines.

Contact: Douglas Tillett