| The Journal of Real Estate Finance and Economics | |
| Volume 24, Issue 1, Article 7 (Abstract) | |
| Title: | Rational Delays: The Case of Real Estate |
| Author: | Stephen Day Cauley and Andrey D. Pavlov |
| Abstract: | Real estate markets, for both commercial real estate and single family homes, typically responds 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 market 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. |
| Keywords: | real estate liquidity, real options, demand shocks, home values |