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

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Author Info
Dennis R. Capozza
Yuming Li

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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. Copyright 2001 by the American Real Estate and Urban Ecopnomics Assocaition.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1080-8620.00020
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Publisher Info
Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 29 (2001)
Issue (Month): 3 ()
Pages: 503-519
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Handle: RePEc:bla:reesec:v:29:y:2001:i:3:p:503-519

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1080-8620

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  1. Robert Fourt & Gianluca Marcato & Charles Ward, 2007. "Real Option Pricing in Mixed-use Development Projects," Real Estate & Planning Working Papers rep-wp2007-09, Henley Business School, Reading University. [Downloadable!]
  2. Flavia Cortelezzi & Giovanni Villani, 2007. "Strategic Technology Adoption and Market Dynamics as Option Games," Quaderni DSEMS 14-2007, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia. [Downloadable!]
  3. Yuming Fu & Maarten Jennen, 2009. "Office Construction in Singapore and Hong Kong: Testing Real Option Implications," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 39-58, January. [Downloadable!] (restricted)
  4. Andrea Beccarini, 2007. "Investment sensitivity to interest rates in an uncertain context: is a positive relationship possible?," Economic Change and Restructuring, Springer, vol. 40(3), pages 223-234, September. [Downloadable!] (restricted)
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