Real option value over a housing market cycle

John Clapp (), Piet Eichholtz and Thies Lindenthal

Regional Science and Urban Economics, 2013, vol. 43, issue 6, 862-874

Abstract: This paper analyzes how the dynamics of house prices are affected by the option to rebuild or enlarge existing dwellings. The nonlinear functional form for option value and zoning limits provides identification of changes in option value over the cycle. For homes with high development potential, our results show that about 40% of the price increases during the boom years after the fall of the Berlin Wall were related to increased option value. In the subsequent bust about 50% of their price decline was associated with decreased option value. For dwellings with low redevelopment potential 12% of the decline in real value can be attributed to changing option value.

Keywords: Redevelopment; Real options; Hedonic model; Segmented equilibrium; Housing cycle; Boom and bust; Nonlinear identification; Zoning limits (search for similar items in EconPapers)
JEL-codes: N9 R1 R2 R3 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:regeco:v:43:y:2013:i:6:p:862-874

DOI: 10.1016/j.regsciurbeco.2013.07.005

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