Hung and So (2012)101 explore the dual role of houses as both durable consumption goods and financial investments. When prices rise, homeowners can benefit by selling the house at a profit. When prices fall, the owner can ignore the investment loss by keeping the house as a durable good providing shelter. This asymmetry can be related to call option pricing, where owners rationally pay more than construction costs because they are receiving an at-the-money call option.
Two kinds of first-time homebuyers gain new insights from these results: Type-A and Type-C. Type-A homebuyers care less about liquidity in the secondhand market and behave more like buy-and-hold investors. They plan to live in the house for a longer period and will not switch easily. To pursue their lifelong dream house, they allocate a much higher proportion of net wealth to residential housing. Once confident about how the house price will evolve, they undervalue the call option and pay less extra premium.
In contrast, Type-C homebuyers care more about liquidity in the secondhand market. For them, the house is only a temporary residence. Given a chance, they will switch to a more suitable one, resulting in a lower proportion allocated to residential housing. When uncertain about how the house price will evolve, they tend to overvalue the call option and are willing to pay a higher extra premium.
This model may explain the extremely high price of real estate in some metropolises. For example, in an area where Type-A homebuyers dominate, house prices might tend to rise. A group of Type-A buyers could drive price momentum, as they are more willing to pay a higher extra premium to hold an option.