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Real option value over a housing market cycle

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

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.

Suggested Citation

  • Clapp, John M. & Eichholtz, Piet & Lindenthal, Thies, 2013. "Real option value over a housing market cycle," Regional Science and Urban Economics, Elsevier, vol. 43(6), pages 862-874.
  • Handle: RePEc:eee:regeco:v:43:y:2013:i:6:p:862-874
    DOI: 10.1016/j.regsciurbeco.2013.07.005
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:regeco:v:64:y:2017:i:c:p:57-67 is not listed on IDEAS
    2. Shi, Song & Yang, Zan & Tripe, David & Zhang, Huan, 2015. "Uncertainty and new apartment price setting: A real options approach," Pacific-Basin Finance Journal, Elsevier, vol. 35(PB), pages 574-591.
    3. Gabriel Lee & Binh Nguyen Thanh & Johannes Strobel, 2017. "Effects of Macroeconomic Uncertainty and Labor Demand Shocks on the Housing Market," Working Papers 170, Bavarian Graduate Program in Economics (BGPE).

    More about this item

    Keywords

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

    JEL classification:

    • N9 - Economic History - - Regional and Urban History
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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