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Speculating on home improvements

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

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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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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  1. 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.
  2. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
  3. Harrison Hong & Jose Scheinkman & Wei Xiong, 2005. "Asset Float and Speculative Bubbles," Levine's Bibliography 122247000000000861, UCLA Department of Economics.
  4. Glaeser, Edward & Saiz, Albert & Gyourko, Joseph, 2008. "Housing Supply and Housing Bubbles," Scholarly Articles 2962640, Harvard University Department of Economics.
  5. 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.
  6. Gur Huberman & Simon Gilchrist & Charles Himmelberg, 2004. "Do Stock Price Bubbles Influence Corporate Investment?," 2004 Meeting Papers 147, Society for Economic Dynamics.
  7. Campbell, John, 2006. "Household Finance," Scholarly Articles 3157877, Harvard University Department of Economics.
  8. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 1253-1296, August.
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