Housing Options: For Sale by Owner

Abstract:     
In this paper I describe a methodology for pricing a set of contingent claims on the value of residential real estate. At least two such contracts are currently offered on owner-occupied single family homes and others have been proposed. I describe how to price these particular contracts, which are essentially call options written by the homeowner on the house value that come into existence when the home is sold. I use this pricing methodology to evaluate the fairness of these agreements for the homeowners writing the contracts. Furthermore, I discuss applications of these contracts related both to idiosyncratic housing price mitigation and well as restructuring mortgages affected by the current housing crisis.

Number of Pages in PDF File: 31

Keywords: Mortgages, Options, Derivatives, Fractional Brownian Motion

JEL Classification: G13, G21

working papers series