An Economic Analysis of Housing Abandonment

Landlord abandonment of rental housing has affected many American cities since the 1960s. Because of data limitations, there have been few empirical analyses of the determinants of housing abandonment. In this paper, we use a rich database that contains information on individual residential properties in New York City to estimate a reduced form model of owner abandonment. We model an owners decision to abandon his or her property as being similar to an investors decision to exercise a put option on a financial instrument. When required to pay delinquent taxes, a wealth-maximizing landlord has an incentive to cede ownership of his or her residential property when the value of all outstanding liens exceeds the propertys market value. Estimates from the model are used to examine whether empirical evidence supports this option model of abandonment.