The Value of the Rent Control Option

In this paper, we combine direct arbitrage arguments and an option-pricing approach to develop a method of pricing the option for rent control. For a lump-sum payment of key money, a tenant acquires the right to rent a real estate unit for an exogenously determined controlled rent, as opposed to paying the free-market rent. The tenant may continue exercising this right as long as he or she lives. Alternatively, the tenant may sell the right to occupy the controlled rent unit and receive a fraction of the key money paid by the subsequent tenant. We value the equilibrium key money, in a representative agents partial equilibrium, while endogenously determining the expected tenure duration in a controlled rent unit. We propose a procedure for valuing rent control options different from the representative agents. Our analysis shows that under real-world levels of conditional life expectancy, the level of the fraction of the key money retained by a departing tenant has an insignificant effect on the expected tenure duration in a controlled rent unit and on the level of key money.     

Property appraisal in high-rises: A cooperative game theory approach

The construction of the higher stories in a building is utterly contingent upon the construction of the lower ones, while the construction of lower stories does not require the construction of the higher ones. This rationale underlies our adoption of a cooperative game theory methodology for examining the value of units based on the cost approach of land appraisal. Particularly, we propose the Shapley value solution to examine the allocation of the land and construction cost among the stories of the building. We explore the allocation mechanism and derive several closed-form properties by which the value pattern of stories in a building is rationalized. The proposed cost allocation may, among other things, generate values when comparable market prices are unobservable (consistent with the cost approach); may be used by courts in order to compute compensations in cases of disputes regarding expansions and redevelopments of existing structures among co-owners; and may determine the rent cost allocation in an organization with several profit centers located on different floors of a building.     

Signaling-Screening Equilibrium in the Mortgage Market

The signaling model of Spence (1973a) and the screening model of Rothchild and Stiglitz (1976) have been separately used to explain economic phenomena when there is asymmetric information. In the real world, however, situations of asymmetric information often simultaneously involve signaling and screening. In this paper, we combine signaling and screening mechanisms and demonstrate a signaling-screening separating equilibrium. We present the analysis within the framework of mortgage markets. Borrowers signal their default risk types to lenders by acquiring different credit records. This partially separates borrowers into subsets. Lenders screen each subset by offering menus of mortgage loan contracts. Borrowers, then, self-select by choosing particular contracts from the menu. We show the conditions under which the signaling-screening equilibrium is Pareto superior to a screening-only equilibrium.     

Mean Reversion and Momentum: Another Look at the Price-Volume Correlation in the Real Estate Market

Based on behavioral finance and economics literature, we construct a theoretical framework in which consumers of newly constructed housing units perceive prices to follow a stochastic mean reversion pattern. Given this belief and the high carrying cost maintained by real estate developers, potential buyers opt to either exercise immediately or defer the purchase. We simulate the model within a real option framework by which we show that the optimal time to wait before exercising a purchase is positively related to the price level; hence, a negative (positive) correlation between transaction volume and price level (yield) emerges. Observing data on housing prices and new construction sales in Israel for the years 1998–2007, we apply an adaptive expectation regression model to test consumers’ belief in both mean reversion and momentum price patterns. The empirical evidence shows that while consumers’ demand pattern is simultaneously consistent with the belief in both momentum and mean reversion processes, the effect of the latter generally dominates. Moreover, while the data does not allow for testing the volume and price-level correlation, it does provide support to the positive volume-price yield correlation.     

A Study of the Brokerage Cost Allocation in a Rental Housing Market with Asymmetric Information

We analyze the brokerage service cost allocation in the rental housing market. We explain the alleged inconsistent phenomenon of landlords only occasionally requiring tenants to incur mediation cost. We show that when asymmetric information is introduced, under which tenants tenure horizon is unobservable to landlords, a separating equilibrium may be attained, in which the length of the tenant's tenure horizon is directly related to his share in the brokerage commission. Finally, we empirically examine and confirm a set of the model's assumptions and derivations within the rental housing-market framework.     

Productive Signaling Equilibria and Over-Maintenance: An Application to Real Estate Markets

When there is asymmetric information regarding the quality of a traded durable asset, the informed seller might signal asset quality to prospective uninformed buyers by investing in improvements and maintenance. In contrast to Spence (1973), however, this signal may be productive. We derive conditions of signal productivity under which signaling separating, signaling pooling, and no-signaling pooling equilibria persist. We examine welfare implications of the model and identify the over-investment in maintenance effect that persists in efficient markets with asymmetric information and productive signaling. Furthermore, we conduct comparative statics analysis of the results and show the range of parameter values in which a particular equilibrium is attained. While the model and its outcomes apply to various durable assets, we particularly refer in the analysis to real estate markets.