Publication Type

Journal Article

Version

Preprint

Publication Date

3-2014

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 increase 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 controlling 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.

Keywords

Home improvements, Real estate, Remodeling, Speculation

Discipline

Finance and Financial Management

Research Areas

Finance

Publication

Journal of Financial Economics

Volume

111

Issue

3

First Page

609

Last Page

624

ISSN

0304-405X

Identifier

10.1016/j.jfineco.2013.11.011

Publisher

Elsevier

Additional URL

http://dx.doi.org/10.1016/j.jfineco.2013.11.011

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