Speculating on home improvements

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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 US cities.
Publisher
ELSEVIER SCIENCE SA
Issue Date
2014-03
Language
English
Article Type
Article
Citation

JOURNAL OF FINANCIAL ECONOMICS, v.111, no.3, pp.609 - 624

ISSN
0304-405X
DOI
10.1016/j.jfineco.2013.11.011
URI
http://hdl.handle.net/10203/249814
Appears in Collection
MT-Journal Papers(저널논문)
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