John D. Benjamin

Flood insurance, wealth redistribution, and urban property values

Abstract This paper examines the economics of the wealth transfer created by the National Flood Insurance Program (NFIP). By its very nature, NFIP is unique in that it subsidizes existing homeowners but not new construction. Thus for comparable properties, the gain captured by existing homeowners is the difference between selling prices of equivalent qualified and nonqualified properties. Using standard hedonic pricing models, we empirically test the impact of subsidized and nonsubsidized flood insurance on property values.

A theory and empirical test of land option pricing

Abstract Land option contracts are agreements whereby a landowner agrees to sell property at a stipulated exercise price to a potential buyer (developer) within a specified length of time. The option contract gives the developer time to coordinate the expertise of many professionals and obtain zoning changes and financing for the property, if necessary. In most cases the developer must either purchase the option to buy the proposed site or purchase the land outright before knowing whether the development is feasible. The landowners objective is to choose an exercise price (and hence an option premium) which will ensure that the developer will exercise the land option. In a bid-price model where developers are risk-neutral and landowners are risk-averse, the prediction is that land options are written with a zero or close to zero time premium. This paper is a test of this hypothesis and the results confirm the theoretical model.

On Option-Pricing Models in Real Estate: A Critique

This paper considers the problems peculiar to options on real estate, because of the special set of institutional factors influencing real estate markets. It is intended to serve as a reply to Johnson and Wofford [15] as well as provide an overall critique of option-pricing models in a real estate context. Our major point is that a variety of real estate decisions, such as the abandonment decision, the option to refinance, or the option to exercise a contingent real estate purchase contract, may be modeled using option-pricing techniques. However, both the theoretical and institutional aspects of real estate markets must be taken into account in both developing and applying option models in a real estate context. Copyright American Real Estate and Urban Economics Association.

Hedonic prices and contractual contingencies

Abstract Hedonic models are widely used to analyze markets for differentiated goods. This paper examines the appropriate specification of characteristics to be included in the hedonic price function. We develop a model that shows that the characteristics of the contract used to transfer a good from the buyer to the seller should also be included in the price function and present an empirical application of the model using data for single-family house transactions. The results indicate that the market exacts a price for the uncertainties created by contractual contingencies in the way described by the model.

An empirical evaluation of the probabilistic bid-rent model: The case of homogenous households

Abstract An unresolved issue in housing economics is the accurate estimation of the demand for housing attributes. Recent research suggests employing a probabilistic choice bid-rent model. An outcome of this theory is that when data can reasonably be assumed homogeneous in household attributes then the bid-rent model should yield plausible estimates of the willingness-to-pay for each ‘household type’. This paper provides empirical support for this hypothesis using a sample of condominium transactions.