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Rational Delays: The Case of Real Estate

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Author Info
Cauley, Stephen Day
Pavlov, Andrey D
Abstract

Real estate markets, for both commercial real estate and single family homes, typically respond to a large negative demand shock with a period during which the volume of transactions and liquidity of real estate declines. Explanations for these periods have focused on overly optimistic owners, imperfections in real estate markets and/or minimum down payment requirements. These are important characteristics of real estate markets, but they do not provide a satisfying explanation for the long-term declines in the number of transactions and liquidity of real estate that frequently follow negative demand shocks. This paper presents estimates, for a specific real estate market (Los Angeles single family dwellings), of the option-like value of an owner's interest in a property. Our estimates imply that when an owner has little or negative equity, the value of waiting to sell is likely to exceed the net carrying cost. Consequently, the option value of a potential seller's interest may eliminate the possibility of an otherwise mutually advantageous transaction. Copyright 2002 by Kluwer Academic Publishers

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Publisher Info
Article provided by Springer in its journal Journal of Real Estate Finance & Economics.

Volume (Year): 24 (2002)
Issue (Month): 1-2 (Jan.-March)
Pages: 143-65
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Handle: RePEc:kap:jrefec:v:24:y:2002:i:1-2:p:143-65

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  1. Edward E. Leamer, 2007. "Housing is the business cycle," Proceedings, Federal Reserve Bank of Kansas City, pages 149-233. [Downloadable!]
    Other versions:
  2. Stephen Cauley & Andrey Pavlov & Eduardo Schwartz, 2007. "Homeownership as a Constraint on Asset Allocation," The Journal of Real Estate Finance and Economics, Springer, vol. 34(3), pages 283-311, April. [Downloadable!] (restricted)
  3. David Ling & Gianluca Marcato & Patrick McAllister, 2008. "The Dynamics of Asset Prices and Transaction Activity in Illiquid Markets: The Case of Private Commercial Real Estate," Real Estate & Planning Working Papers rep-wp2008-11, Henley Business School, Reading University. [Downloadable!]
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This page was last updated on 2009-12-4.

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