Abstract

http://ssrn.com/abstract=1685005
 
 

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Speculating on Home Improvements


Hyun-Soo Choi


Singapore Management University

Harrison G. Hong


Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jose A. Scheinkman


Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

June 1, 2013

Journal of Financial Economics (JFE), Forthcoming
Economic Theory Center Working Paper No. 22-2011

Abstract:     
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 fi xed their land. The recoup value (the di fference 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-fi nancial constraints motive in which rising home prices loosen fi nancial 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 U.S. cities.

Number of Pages in PDF File: 50

Keywords: Speculation, Home Improvements, Real Estate, Remodeling

JEL Classification: G11, R21

working papers series


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Date posted: October 1, 2010 ; Last revised: December 31, 2013

Suggested Citation

Choi, Hyun-Soo and Hong, Harrison G. and Scheinkman, Jose A., Speculating on Home Improvements (June 1, 2013). Journal of Financial Economics (JFE), Forthcoming; Economic Theory Center Working Paper No. 22-2011. Available at SSRN: http://ssrn.com/abstract=1685005 or http://dx.doi.org/10.2139/ssrn.1685005

Contact Information

Hyun-Soo Choi (Contact Author)
Singapore Management University ( email )
Lee Kong Chian School of Business
50 Stamford Road
Singapore 178899, 178899
Singapore
Harrison G. Hong
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jose A. Scheinkman
Columbia University ( email )
420 W. 118th Street
New York, NY 10027
United States
HOME PAGE: http://www.princeton.edu/~joses
Princeton University - Department of Economics ( email )
26 Prospect Avenue
Princeton, NJ 08544
United States
609-258-4020 (Phone)
609-258-6419 (Fax)
HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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