Real Options Approach to Housing Investment

摘要

In this paper, we focus on investments by existing homeowners to improve theirhomes. In our model, the value of a house is equal to the expected net present value of a perpetual stream of service flows emanating from the attributes of the house. An important innovation in our model is that the set of house attributes evolves over time according to the investment decisions of the homeowner. The homeowner's decisions to invest in house attributes are modeled as real options. The homeowner compares the value of an additional attribute, net of the value of the opportunity to invest in the future, to the cost of the investment when deciding whether or not to invest. Our model of investment embeds a multifactor term structure model and a general model of the evolution of service flows. We employ numeric simulations to explore the properties of the investment model, and to motivate our empirical test of the model. The main contribution of this paper is an empirical test of whether or not observed homeowner investment behavior is consistent with the real option theory of investment. Using a nationally representative panel from the American Housing Survey, we test two implications of the real option theory. First, we test whether investment is more likely when the spread between the return to housing and the cost of capital is wide. Second, we test whether greater spread volatility depresses investment. Our empirical results indicate that observed homeowner investment behavior is consistent with these implications of the theory, even after controlling for business cycle, aging, tenure and for-sale influences.