Title

Speculating on Home Improvements

Author(s)

Hyun-Soo Choi Hyun-Soo Choi (Princeton University)

Harrison Hong Harrison Hong (Princeton University and NBER)

Jose Scheinkman Jose Scheinkman (Princeton University and NBER)

Abstract

We develop a speculation-based theory of home improvements. Housing services are produced from a mix of land and structures. Homeowners have an option to in- crease their structures (i.e. make improvements) holding fixed their land. Speculative improvements arise because overconfident homeowners mistakenly believe they can add to structures for a lower cost than a competitive construction industry. Improvements are increasing and convex in home prices. There is excessive home remodeling in equilibrium. And the change in the recoup ratio (the ratio of resale value of improvements to construction costs) is negatively correlated with construction cost growth control- ling for home price appreciation. We provide evidence consistent with our theory using data on the costs and recoup values of remodeling projects across U.S. cities.

Creation Date

2011-07

Section URL ID

ET

Paper Number

wp022_2011_Choi_Hong_Scheinkman.pdf

URL

http://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=4280&context=lkcsb_research

File Function

Jel

C010, C500, D100, L850

Keyword(s)

Suppress

false

Series

10