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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.

Suggested Citation

  • Choi, Hyun-Soo & Hong, Harrison & Scheinkman, Jose, 2014. "Speculating on home improvements," Journal of Financial Economics, Elsevier, vol. 111(3), pages 609-624.
  • Handle: RePEc:eee:jfinec:v:111:y:2014:i:3:p:609-624 DOI: 10.1016/j.jfineco.2013.11.011

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    References listed on IDEAS

    1. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 1253-1296.
    2. 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.
    3. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, August.
    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. Harrison Hong & José Scheinkman & Wei Xiong, 2006. "Asset Float and Speculative Bubbles," Journal of Finance, American Finance Association, vol. 61(3), pages 1073-1117, June.
    6. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 261-292.
    7. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    8. 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.
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    Cited by:

    1. Bracke, Philippe & Tenreyro, Silvana, 2016. "History dependence in the housing market," Bank of England working papers 630, Bank of England.
    2. Bracke, Philippe & Tenreyro, Silvana, 2016. "History dependence in the housing market," LSE Research Online Documents on Economics 86176, London School of Economics and Political Science, LSE Library.
    3. repec:eee:jhouse:v:37:y:2017:i:c:p:29-41 is not listed on IDEAS

    More about this item


    Speculation; Home improvements; Real estate; Remodeling;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand


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