Thursday, June 28, 2012
Robert Edelstein (Berkeley-Economics), Peng Liu (Cornell), and Fang Wu (Citadel LLC) have posted The Market for Real Estate Presales: A Theoretical Approach (J. of Real Estate Finance & Economics) on SSRN. Here's the abstract:
Presale agreements have become a pervasive worldwide practice for residential sales, especially in many Asian markets. Although there is a burgeoning empirical literature on presales agreements, only a few papers actually address their theoretical foundations. We create a set of interrelated theoretical models for explaining how and why developers and buyers engage in presale contracts for non-completed residential dwellings. Given heterogeneous consumer beliefs about future market prices, developers and buyers enter into presale agreements to mitigate, two intertwined, fundamental risks: those of real estate market valuation and default. Our analyses are consistent with prior empirical findings and provide additional theoretical insights for understanding the market for presales.