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Speculating on home improvements

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Author Info

  • Choi, Hyun-Soo
  • Hong, Harrison
  • Scheinkman, Jose

Abstract

We develop a speculation-based theory of home improvements. Housing services are produced from a mix of land and structures. Homeowners optimistic about future prices for these services speculate by making improvements, which we model as them increasing their structures holding fixed their land. The recoup value (the difference between the resale value of improvements and construction costs) is simultaneously increasing in home price appreciation and falls with construction cost growth. This prediction stands in contrast to a consumption-cum-financial constraints motive in which rising home prices loosen financial constraints and lead to lower recoup values. We provide evidence consistent with a speculative motive using data on the costs and recoup values of remodeling projects across US cities.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304405X13003000
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 111 (2014)
Issue (Month): 3 ()
Pages: 609-624

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Handle: RePEc:eee:jfinec:v:111:y:2014:i:3:p:609-624

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Speculation; Home improvements; Real estate; Remodeling;

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References

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  1. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc.
  2. Harrison Hong & Jose Scheinkman & Wei Xiong, 2005. "Asset Float and Speculative Bubbles," NBER Working Papers 11367, National Bureau of Economic Research, Inc.
  3. Glaeser, Edward L. & Gyourko, Joseph & Saiz, Albert, 2008. "Housing supply and housing bubbles," Journal of Urban Economics, Elsevier, vol. 64(2), pages 198-217, September.
  4. Gilchrist, Simon & Himmelberg, Charles P. & Huberman, Gur, 2005. "Do stock price bubbles influence corporate investment?," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 805-827, May.
  5. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 1253-1296, August.
  6. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
  7. Montgomery, Claire, 1992. "Explaining home improvement in the context of household investment in residential housing," Journal of Urban Economics, Elsevier, vol. 32(3), pages 326-350, November.
  8. Brad M. Barber & Terrance Odean, 2001. "Boys Will Be Boys: Gender, Overconfidence, And Common Stock Investment," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 261-292, February.
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