Rational Delays: The Case of Real Estate

Rational Delays: The Case of Real Estate Real estate markets, for both commercial real estate and single family homes, typically respond to a large negative demand shock with a period during which the volume of transactions and liquidity of real estate declines. Explanations for these periods have focused on overly optimistic owners, imperfections in real estate markets and/or minimum down payment requirements. These are important characteristics of real estate markets, but they do not provide a satisfying explanation for the long-term declines in the number of transactions and liquidity of real estate that frequently follow negative demand shocks. This paper presents estimates, for a specific real estate market (Los Angeles single family dwellings), of the option-like value of an owner's interest in a property. Our estimates imply that when an owner has little or negative equity, the value of waiting to sell is likely to exceed the net carrying cost. Consequently, the option value of a potential seller's interest may eliminate the possibility of an otherwise mutually advantageous transaction. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Rational Delays: The Case of Real Estate

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2002 by Kluwer Academic Publishers
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1023/A:1013990523388
Publisher site
See Article on Publisher Site

Abstract

Real estate markets, for both commercial real estate and single family homes, typically respond to a large negative demand shock with a period during which the volume of transactions and liquidity of real estate declines. Explanations for these periods have focused on overly optimistic owners, imperfections in real estate markets and/or minimum down payment requirements. These are important characteristics of real estate markets, but they do not provide a satisfying explanation for the long-term declines in the number of transactions and liquidity of real estate that frequently follow negative demand shocks. This paper presents estimates, for a specific real estate market (Los Angeles single family dwellings), of the option-like value of an owner's interest in a property. Our estimates imply that when an owner has little or negative equity, the value of waiting to sell is likely to exceed the net carrying cost. Consequently, the option value of a potential seller's interest may eliminate the possibility of an otherwise mutually advantageous transaction.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 18, 2004

References

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