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Real option value over a housing market cycle

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  • Clapp, John M.
  • Eichholtz, Piet
  • Lindenthal, Thies
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    Abstract

    This paper analyzes how the dynamics of house prices are affected by the option to rebuild or enlarge existing dwellings. The nonlinear functional form for option value and zoning limits provides identification of changes in option value over the cycle. For homes with high development potential, our results show that about 40% of the price increases during the boom years after the fall of the Berlin Wall were related to increased option value. In the subsequent bust about 50% of their price decline was associated with decreased option value. For dwellings with low redevelopment potential 12% of the decline in real value can be attributed to changing option value.

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    Bibliographic Info

    Article provided by Elsevier in its journal Regional Science and Urban Economics.

    Volume (Year): 43 (2013)
    Issue (Month): 6 ()
    Pages: 862-874

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    Handle: RePEc:eee:regeco:v:43:y:2013:i:6:p:862-874

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    Web page: http://www.elsevier.com/locate/regec

    Related research

    Keywords: Redevelopment; Real options; Hedonic model; Segmented equilibrium; Housing cycle; Boom and bust; Nonlinear identification; Zoning limits;

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    References

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