Price fluctuations in housing market and homeowners' options to move

Abstract

This study attempts to explain the causes of turning points in real estate cycles and try to relate the housing price cycle to householdsa?? moving decisions. The main contribution of the thesis is that it extends Stein (1995) hypothesis by incorporating real option theory and voting theory into the housing moving decision model. Building on the theory by Stein (1995), we surmise that a positive exogenous shock will swing the households to move up their housing career. The down payment requirements further reinforce the effects and the number of transactions increases. Yet the increase in both transactions and price volatility entices households to wait for possible increase in price in future. The waiting phenomenon further dampens the demand for new dwelling. Coupled with possible new supply, we expect price to fall. The effects of loss aversion and equity constraints set in and the number of transactions and price volatility fall, until some point when it is beneficial to exercise the option. We further extend the above analysis by including the householdsa?? improvement decisions into the picture. Further to the above, we also note that housing improvement decisions in the multi-family picture are collectively made. We further test the model postulated by Ben Shahar and Sulganik (2003) whether households make their votes based on minimizing disutility. In addition, we further test whether households do learn new strategies to abstain, or move over time, especially if they find the new strategy is more optimal.