A theory of predictable excess returns in real estate

A principal-agent model is employed to characterize the equilibrium mortgage contract. The value of a house depends on the actions of its owner but affects the wealth of both the owner and the lender who writes the mortgage contract with which the house is purchased. Because of this, the buyer is exposed to moral hazard. In some situations, this can lead to inefficient maintenance and predictable excess returns to home ownership. Even though there are potential buyers willing to pay back more money, the bank will not write loans for these consumers because of the adverse incentive effects of such an action.     

Risk management of real estate: The case of real estate swaps

Real estate swaps are a recent financial innovation based upon the principle of comparative advantage. A real estate swap is a useful tool for real estate risk management and for participating in real estate investment without the high costs associated with real estate. Potential economic benefits and costs associated with real estate swaps are considered and real estate swaps are compared to alternative tools for real estate risk management. The expected utility and effectiveness of risk management with a swap in a multiperiod framework are analyzed. The analysis finds that the subject property's return and its risk characteristics (as reflected in its correlation with interest rate and property index returns) delimit the risk management potential of a given swap position. Optimal swap positions are shown for various regions and property types based on historical return series, from the period between 1983 and 1992, and the parameters of the dynamic model developed.     

Real estate auctions: A survey of theory and practice

Recent downturns in real estate markets combined with a general acceptance of auctions have resulted in an unprecedented number of auction sales. A need therefore exists for the further development of real estate auction models that can provide insights into this emerging market institution. To facilitate this task a survey of auction theory as pertaining to its application in real estate markets is provided in this paper. Topics addressed includes bidding equilibria, the role of reserve prices, information disclosure, the decision to use auctions, bidder participation, and multiple-object sales. An overview of empirical studies in this area is also provided.     

The persistence of real estate cycles

This paper presents a model that attempts to explain the underlying causes of the prolonged cycles observed in real estate markets. In addition, the paper characterizes the features that make some property types more prone to such boom-and-bust behavior. The combination of demand uncertainty, adjustment costs, and construction lags leads to two phenomena that may help explain market persistence. The first phenomenon is the reluctance of owners to adjust occupancy levels, even in the face of large shifts in renter demand. The second phenomenon is the occurrence of periods of sustained overbuilding: the addition of new supply in the face of already high vacancy rates.     

Empirical tests of real estate market efficiency

Recent empirical research using real estate data has supported the weak and semi-strong forms of the efficient markets hypothesis. Previous studies have not included an estimate of expected appreciation into the tests of market efficiency, thus raising a question about the reliability of the results. We first use a market model to test for market efficiency with results similar to those reported by others. We next use a dynamic multiple indicator, multiple cause (DYMIMIC) model, which extracts a vector of expected appreciation from the price data, to test market efficiency. This approach produces superior results and a stronger conclusion about the efficiency of housing markets. The results indicate limited adjustment delays which can be explained by the existence of high transactions and search costs.     

The impact of auctions on residential property prices

This study assesses whether the sale method in residential real estate markets – auction versus private treaty – is a determinant of sale price. Utilising a larger and richer dataset than previous research, we test for a price effect in auction sales in Sydney and Christchurch. When self‐selection biases are corrected for, using two‐stage hedonic regression analysis and a matched sampling procedure, we find no significant difference between prices of properties sold at auction to those sold by private treaty. This conflicts with the conclusions of previous research in the Australian and New Zealand housing markets, which have documented a price premium associated with auction sales.     

Contracts for the sale of residential real estate

I propose a model where the terms of a real estate broker's contract influence both the broker's and theseller's choices. Given equal contract, higher quality, and thus higher priced on average, houses will sell in less time. Thus, simple conditions suffice to show that a competitively set commission rate should fall as the average price rises and, since a seller's cost of waiting are higher for higher quality houses, a cartel's commission rate should rise with the average price. Because this model studies the effects of alternate contracts on observable variables such as the price of a house and its time-till-sale, its implications are testable.     

A reexamination of corporate sell-offs of real estate assets

This article reexamines the now generally accepted notion that sell-offs of real estate assets provide positive returns for sellers but not for buyers. Following previous research, we use event study methods, but we modify the conventional market model to permit its residuals (unexpected returns) to be described by a time-varying conditional variance. We also differ from previous work in that our sample contains only sell-offs that can be precisely dated. Although we find substantial evidence of time-varying volatility in the unexpected return series, our economic results confirm the conventional viewpoint.     

The sensitivity of bank stock returns to real estate

According to the Federal Reserve Board, banking firms have recently been shifting significantly larger portions of their loan portfolios into real estate. This increase in real estate lending has caused concern about the continuing economic health of banks on the part of state and federal regulators, since changes in real estate returns, evidenced by changes in property value, can potentially have a significant impact on bank default risk and profit-ability. However, concerned parties do not seem to have explicitly considered the relationship between mortgage default risk and the specific characteristics of real estate investments.This study examines the sensitivities of stock returns for different bank groups, based on the percentage of total loans in real estate and the percentage of loans in five different mortgage categories (construction and development loans, farmland loans, one- to four-family residential loans, multifamily residential loans, and nonresidential and nonfarm loans), to changes in real estate market returns. This is done by developing and using a three-index model.The results of this study indicate that bank stocks, overall, are very sensitive to changes in real estae returns. Banks, with a larger portion of their total loans invested in all types of real estate loans, except farmland loans, are most sensitive to changes in real estate returns.     

The predictability of real estate returns and market timing

Recent evidence suggests that all asset returns are predictable to some extent with excess returns on real estate relatively easier to forecast. This raises the issue of whether we can successfully exploit this level of predictability using various market timing strategies to realize superior performance over a buy-and-hold strategy. We find that the level of predicability associated with real estate leads to moderate success in market timing, although this is not necessarily the case for the other asset classes examined in general. Besides this, real estate stocks typically have higher trading profits and higher mean risk-adjusted excess returns when compared to small stocks as well as large stocks and bonds even though most real estate stocks are small stocks.     

The role of co-skewness in the pricing of real estate

The current study investigates whether systematic skewness offers an alternative perspective as to why the risk-adjusted returns on real estate should be similar to that for stocks. This is not a trivial issue since an affirmative finding implies that we might be incorrectly measuring real estate risk from both a pricing and a portfolio allocation perspective. A multivariate test of the Kraus-Litzenberger model is used to investigate this skewness proposition with the K-L CAPM tested against several alternative versions of the CAPM. The study finds that the Kraus-Litzenberger model offers additional insights into the measurement of real estate risk. Evidence is also found that both the zero beta and the consumption-oriented CAPM hold, which is consistent with the recent literature in real estate.     

The effects of environmental liability on industrial real estate development

The paper explores the effects of current liability law on real estate transactions involving properties with potential environmental contamination. Sources of uncertainty and their likely impact on transactions are identified. Liability-driven market distortions are likely to be due less to legal uncertainty than to problems arising from asymmetric information and imperfect detection.     

The accuracy of real estate indices: Repeat sale estimators

Simulation techniques allow us to examine the behavior and accuracy of several repeat sales regression estimators used to construct real estate return indices. We show that the generalized least squares (GLS) method is the maximum likelihood estimator, and we show how estimation accuracy can be significantly improved through a Baysian approach. In addition, we introduce a biased estimation procedure based upon the James and Stein method to address the problems of multicollinearity common to the procedure.     

The effect of real rates of interest on housing prices

During the late 1970s, U.S. house prices were appreciating rapidly even though mortgage interest rates were climbing. Recently, interest rates have eased but prices have moderated. This study examines the role of appreciation expectations in overcoming the negative effects of nominal mortgage interest rates on house prices. Expectations of future appreciation are important determinants of house sales prices, remaining influential during periods of declining and moderating real prices, not just when prices are rising. The real rate of interest, as viewed by the homebuyer, is the mechanism for affecting change in housing price levels. Because the nominal interest rate is slow to reflect changes in expectations, these real rates vary over time. This ebb and flow of real interest rates appears to explain market price levels. Nominal rates play a role as well, primarily in the formation of appreciation expectations.     

Reducing the impact of real estate foreclosures with Amortizing Participation Mortgages

We employ Amortizing Participation Mortgage (APM) to offer a novel ex post renegotiation method of a foreclosure. APM belongs to the family of home loan credit facilities advocated in the Dodd–Frank Wall Street Reform and Consumer Protection Act 2010. In our framework, APMs reduce the endemic agency costs of debt by improving affordability. These benefits increase the demand for real estate in bust times and reduce fragility of the financial system thereby preventing foreclosures. We evaluate APMs in a stochastic control framework and provide solutions for an optimal amortization schedule. We generalize our approach to partially amortizing and commercial mortgages which encompass balloon payments. Finally, we provide concrete numerical examples of home loan modifications. We also offer detailed sensitivity analysis to market parameters such as house price volatility and interest rates.     

德国房地产市场保持平稳的经验

金融危机前后,欧洲多个国家房地产业经历了大起大落,而德国房地产业却保持平稳发展态势,德国房地产业的成功经验值得借鉴。其较高的城市化水平使得各地房产市场发展水平均衡;发达的租赁市场辅助房价稳定;政府更多强调房地产的社会福利性质,并通过健全的法律制度安排,满足各阶层民众的不同层次住房需求。     

Equity and fixed income markets as drivers of securitised real estate

This paper re-examines the sensitivity and importance of interest rates and stock market price behavior on securitised property by decomposing their long-run impact between transient and permanent effects. This is achieved in a framework that accounts for endogenously determined structural breaks within the data. The results provide a different perspective on the relationship securitised property has with these markets and sheds new light on their long-run interaction. Once structural breaks are accounted for the results show that securitised property is driven by both interest rate and stock market changes, regardless of the type of securitised property being examined. Evidence also points to companies with increased debt-to-asset ratios and companies that are tax-exempt entities are still all influenced by both the equity and fixed income markets over the long-run period, although the influence these factors have do vary across time.     

Statistical properties of returns: Financial assets versus commercial real estate

This study examines the distribution of commercial real estate returns by region (east, midwest, south, and west), by property type (office, retail, R&D office, and warehouse) and in the aggregate, and compares their distributions to those of financial assets. Nominal and real returns are examined for quarterly, semiannual, and annual periods. The quarterly nominal returns on the financial assets are mostly normal with very little indication of autocorrelation. In contrast, non-normality and autocorrelation are present in most of the nominal quarterly real estate series. The non-normality is greatly reduced when semiannual or annual returns are considered or when the quarterly series are corrected for autocorrelation. The non-normality is also lower for real returns than it is for nominal returns.     

The wealth effects of real estate transactions: The case of REITs

Recent literature analyzing corporate acquisitions and sales of real estate has shown that statistically significant gains accrue to both buyers and sellers when the transaction is announced. In this paper, we focus solely on the real property transactions of tax-qualified Real Estate Investment Trusts (REITs) to determine if REIT shareholders experience a similar pattern of positive wealth effects. We find that REITs do not experience any significant wealth effects from transaction announcements. However, we provide evidence that a significant positive wealth effect does occur upon the announcement of a sale transaction when the sale is associated with an increase in REIT dividends.