Speculating on Home Improvements

50 Pages Posted: 1 Oct 2010 Last revised: 31 Dec 2013

Hyun-Soo Choi

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)

Date Written: June 1, 2013

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.

Keywords: Speculation, Home Improvements, Real Estate, Remodeling

JEL Classification: G11, R21

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: https://ssrn.com/abstract=1685005 or http://dx.doi.org/10.2139/ssrn.1685005

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

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
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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