Speculating on Home Improvements
Singapore Management University
Harrison G. Hong
Columbia University, Graduate School of Arts and Sciences, 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
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 U.S. cities.
Number of Pages in PDF File: 50
Keywords: Speculation, Home Improvements, Real Estate, Remodeling
JEL Classification: G11, R21
Date posted: October 1, 2010 ; Last revised: December 31, 2013
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