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Speculating on Home Improvements

Author

Listed:
  • Hyun-Soo Choi

    (Princeton University)

  • Harrison Hong

    (Princeton University and NBER)

  • Jose Scheinkman

    (Princeton University and NBER)

Abstract

We develop a speculation-based theory of home improvements. Housing services are produced from a mix of land and structures. Homeowners have an option to in- crease their structures (i.e. make improvements) holding fixed their land. Speculative improvements arise because overconfident homeowners mistakenly believe they can add to structures for a lower cost than a competitive construction industry. Improvements are increasing and convex in home prices. There is excessive home remodeling in equilibrium. And the change in the recoup ratio (the ratio of resale value of improvements to construction costs) is negatively correlated with construction cost growth control- ling for home price appreciation. We provide evidence consistent with our theory using data on the costs and recoup values of remodeling projects across U.S. cities.

Suggested Citation

  • Hyun-Soo Choi & Harrison Hong & Jose Scheinkman, 2011. "Speculating on Home Improvements," Working Papers 1355, Princeton University, Department of Economics, Econometric Research Program..
    • Handle: RePEc:pri:metric:wp022_2011_choi_hong_scheinkman.pdf
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    File URL: http://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=4280&context=lkcsb_research
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    References listed on IDEAS

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    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. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    7. 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.
    8. 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.
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    Citations

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    Cited by:

    1. 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.
    2. Itzhak Ben-David & Pascal Towbin & Sebastian Weber, 2019. "Expectations During the U.S. Housing Boom: Inferring Beliefs from Actions," NBER Working Papers 25702, National Bureau of Economic Research, Inc.
    3. Bian, Xun, 2017. "Housing equity dynamics and home improvements," Journal of Housing Economics, Elsevier, vol. 37(C), pages 29-41.

    More about this item

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • D10 - Microeconomics - - Household Behavior - - - General
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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