House price uncertainty, timing of development, and vacant land prices: Evidence for real options in Seattle

Recent theoretical work suggests that land development exercises a real option. This paper utilizes a rich data set of parcel characteristics and real property transactions for the Seattle area to tests two predictions of real options with respect to land markets: greater price uncertainty should delay the timing of development and raise land prices. I find evidence in support of both predictions. A one-standard-deviation increase in uncertainty lowers the likelihood of development by 11 percent and raises vacant land prices by 1.6 percent. These findings suggest that developers consider their real option to future buildings when deciding to invest.