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Residential Investment and Interest Rates: An Empirical Test of Land Development as a Real Option

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  • Dennis R. Capozza
  • Yuming Li

Abstract

In real options models, investment can increase under some conditions when interest rates rise. This research tests for these positive interest rate responses in the context of the Capozza–Li model of land development. In the model variable capital intensity is a sufficient condition for positive responses to interest rates that can occur when growth rates are high or uncertainty is high. The empirical analysis uses a panel data set on residential investment in the 1980s and finds that 25–50% of the sample lies in the positive response region.

Suggested Citation

  • Dennis R. Capozza & Yuming Li, 2001. "Residential Investment and Interest Rates: An Empirical Test of Land Development as a Real Option," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(3), pages 503-519, March.
    • Handle: RePEc:bla:reesec:v:29:y:2001:i:3:p:503-519
    DOI: 10.1111/1080-8620.00020
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