Auction versus Negotiated Sale: Evidence from Real Estate Sales

We offer a theoretical and empirical comparison of auctions and negotiated sales. We first build a simple model to show that auctions generate a higher relative price than negotiated sales when demand for the asset is strong, when the asset is more homogeneous and when the asset attracts buyers with higher valuations. Using data from property sales in Singapore, we find support for our theoretical predictions. In addition, we find that auctions do not necessarily generate a higher price premium for foreclosed properties than for nonforeclosed properties.     

Market Microstructure and Real Estate Returns

This paper examines the Real Estate Investment Trust (REIT) market microstruc-ture and its relationship to stock returns. When compared with the general stock market, REIT stocks tend to have a lower level of institutional investor participation and are followed by fewer security analysts. In addition, REIT stocks that have a higher percentage of institutional investors or are followed by more security analysts tend to perform better than other REIT stocks. Our results seem to confirm Jensen's ( 1993 , p. 868) proposition that ownership structure (that is, who owns the firm's securities) affects the value of the firm. Our findings also have implications about the well documented phenomenon that the financial performance of Commingled Real Estate Funds (CREFs) is better than that of REITs.     

The Housing Market and Real Estate Brokers

The major development in this paper concerns the failure, in earlier studies, to consider interaction between alternative methods of arranging sales in the housing market. A seller may market a house by direct negotiations with buyers, without the intermediation of real estate brokers, or by listing the house with a broker. A rational seller would choose the option which offers the higher expected return on the house. In a sequence of models we argue that the seller's option of a method of sale induces competitive pressure in the choice of the commission rate by the broker. We also consider the split rate in a multiple listing system, ease of entry of brokers and the cartel hypothesis as applied to brokers. We conclude that the competitive pressure of direct negotiations between sellers and buyers, relative free entry of brokers and the inappropri-ateness of the cartel hypothesis cast serious doubt about a general consensus of opinion that the brokerage system is characterized by price fixing, excessive commissions and excessive marketing costs.     

Adjustments in the Real Estate Market

AREUEA is pleased to acknowledge the support of the National Association of REALTORS in the preparation of this issue. We are particularly grateful to John Tuccillo, Senior Vice President and Chief Economist at NAR, for recognizing the importance of this research area and encouraging these studies. The editors would also like to acknowledge the continuing support of their colleagues at The Ohio State University and of the Homer Hoyt Institute.     

The Real Estate Brokerage Market: A Critical Reevaluation

This paper presents an analysis of the theories and evidence regarding the structure and performance of the market for real estate brokerage services. Some of the theoretical models found in the literature appear to suffer from logical inconsistencies, while others lack empirical support for their underlying assumptions and/or their predictions of market inefficiencies. Moreover, several important legal and institutional changes that have occurred recently have not been given sufficient attention in the existing literature.
Although some new evidence on this market is presented here, additional empirical research is warranted in at least two areas: the current pricing structure and the underlying production and cost functions of the real estate brokerage industry.     

哈尔滨市房地产市场供求分析

首先对哈尔滨市住宅价格进行了预测分析,然后通过利用房地产市场非均衡分析的最小原则模型对哈尔滨市房地产市场进行了非均衡分析,得出了市场有效供求与实际交易量的关系,计算了房地产市场的非均衡度,并探讨了导致哈尔滨市房地产市场非均衡的原因。     

A Simple Search and Bargaining Model of Real Estate Markets

This paper examines the impact of brokers on buyers' and sellers' search behavior and on the transaction prices in real estate markets. It is shown that the seller and the buyer search less intensively if the house is listed with a broker. The seller gets a higher price when he employs a broker, but the increase in price is smaller than the commission fee. More specifically, the portion of the commission covered by the increase in price is directly related to the bargaining powers of the buyer and the seller. In the special case where the price is determined according to the Nash bargaining solution, the increase in price is shown to be half of the commission fee. It is also shown that an increase in the commission rate increases the equilibrium price but decreases the equilibrium search intensities.     

The Fractal Structure of Real Estate Investment Trust Returns: The Search for Evidence of Market Segmentation and Nonlinear Dependency

This article presents a further test for market segmentation between the real estate market and the capital markets. We use rescaled range analysis developed in the fractal geometry literature to test for nonlinear trends in the returns series for different asset classes. We make three major conclusions: (1) the stock market displays tendencies consistent with a random walk, (2) portfolios of mortgage and equity REIT returns display tendencies consistent with a random walk and, (3) conditional upon the methods used, segmentation does not exist between different real estate markets and between the real estate and stock markets.     

Financing Choice and Liability Structure of Real Estate Investment Trusts

We conduct an analysis of public financial offerings of equity Real Estate Investment Trusts (REITs), with a focus on liability structure effects and whether or not firms target longer-run debt ratios. Our major findings are that (1) proceeds from equity offers are more likely to fund investment, whereas public debt offer proceeds are typically used to reconfigure the liability structure of the firm; (2) public debt issuers are often capital constrained and target total leverage ratios to retain an investment grade credit rating; and (3) the preoffer liability structure affects the issuance choice decision, in that firms with higher preoffer levels of secured (unsecured) debt tend to issue equity (public debt). Other notable findings are that the market for public REIT debt is integrated with the broader debt markets and that higher credit quality firms issue longer-maturing bonds.     

Concentration and Market Structure in Local Real Estate Markets

The competitiveness of the residential real estate brokerage industry has attracted much attention. Anecdotal evidence suggests some local markets are concentrated, yet no systematic market structure study has been conducted. We collected cross‐sectional data on real estate brokers in 90 diverse markets across the United States and collected longitudinal data for Louisville, Kentucky. In medium and large markets, no evidence exists that market concentration might create problems for competition. Small markets, on average, have higher Herfindahl‐Hirschman Indexes than medium and large markets. The longitudinal data reveal that many small brokers sell a house or two one year and none the next year.     

Illiquidity and Pricing Biases in the Real Estate Market

This article addresses the micro-analytic foundations of illiquidity and price dynamics in the real estate market by integrating modern portfolio theory with models describing the real estate transaction process. Based on the notion that real estate is a heterogeneous good that is traded in decentralized markets and that transactions in these markets are often characterized by costly searches, we argue that the most important aspects defining real estate illiquidity in both residential and commercial markets are the time required for sale and the uncertainty of the marketing period. These aspects provide two sources of bias in the commonly adopted methods of real estate valuation, which are based solely on the prices of sold properties and implicitly assume immediate execution. We demonstrate that estimated returns must be biased upward and risks downward. These biases can be significant, especially when the marketing period is highly uncertain relative to the holding period. We also find that real estate risk is closely related to investors' time horizons, specifically that real estate risk decreases when the holding period increases. These results are consistent with the conventional wisdom that real estate is more favorable to long-term investors than to short-term investors. They also provide a theoretical foundation for the recent econometric literature, which finds evidence of smoothing of real estate returns. Our findings help explain the apparent risk-premium puzzle in real estate—that is, that ex post returns appear too high, given their apparent low volatility—and can lead to the formal derivation of adjustments that can define real estate's proper role in the mixed-asset portfolio.     

Real Estate Brokers and the Market for Residential Housing

This study explores the role of the real estate broker in the housing market. A model of the demand for broker services by both sellers and buyers is developed and conditional logit estimates are presented. Evidence relating to the effects of the brokerage industry on housing market transactions also is presented. Brokers do not seem to affect the prices of the houses they sell. But they do influence the level of housing consumption by buyers.     

Non-Uniform Percentage Brokerage Commissions and Real Estate Market Performance

The effect of non-uniform commissions on the market duration of residential properties is ambiguous. While the broker's search effort is positively related to the size of the percentage commission, so is the seller's reservation price. Each of these relationships imply a time-on-market effect in the opposite direction of the other. A powerful statistical technique, survival regression, is employed to determine which relationship dominates. Because the probability that a property will sell at any given point in time is inversely related to the size of the percentage commission, we conclude that the negative search effects associated with low commission rates are more than offset by the positive reservation price effects.     

Market Share in the Real Estate Brokerage Industry

This paper is concerned with the factors that determine the market share of listings and the market share of sales for brokerage firms. Models are developed and tested in a SMSA that conveniently corresponds exactly to a particular Multiple Listing Service area. Indices of firm specialization and market concentration were computed in addition to more conventional characterizations of the market and the data used in the study.
The regression results reveal a small degree of consistency in the impacts of the explanatory variables over the two years of the study and over the listing and sales markets. The number of salespeople is the most consistently significant variable. Indeed, market share per salesperson appears to be a non-monotonic function of the number of salespeople. The presence of a franchise and the quantity of display advertising are occasionally significant. Classified advertising, Yellow Pages advertising, and open houses all do not significantly affect market share per salesperson.     

Appraisal-Based Real Estate Returns under Alternative Market Regimes

In this article we use Monte Carlo simulation to study the statistical properties of real estate returns. We set up a model where transactions prices are noisy signals of true prices. We then consider a number of appraisal rules, derived from Bayesian and non-Bayesian theory, to estimate the current true price and rate of return. The class of exponential smoothing and Kalman filter rules perform well at both the disaggregate (returns on an individual property) and aggregate (returns on a real property portfolio) levels. A special case of exponential smoothing (α= 1.0) places all weight on current market data. Since this case eliminates smoothing, our results suggest that appraisers should place all weight on current data (no weight on past data) provided that they want to estimate returns rather than values. However, these results should be used with caution if sales prices are very noisy.     

House Prices and Regional Real Estate Cycles: Market Adjustments in Houston

Real estate cycles often generate sharp swings in real housing prices, price changes that cannot be adequately described by a single statistic such as median home values. Instead, the entire structure of prices across all quality levels must be examined. This paper analyzes the price impact of the Houston, Texas, real estate bust. It shows that the average price of housing fell, and that the structure of the housing price function itself changed. Changes in the marginal price of housing were probably more significant to the market equilibrating process than the decline in average price alone.     

Public Versus Private Real Estate Equities: A More Refined, Long-Term Comparison

In this article we compare public and private real estate equities. In so doing, we control for three of the main differences between these investment alternatives: property-type mix, leverage and appraisal smoothing. With these two restated indices, we then run tests to determine in a statistical sense whether the restated means and volatilities of the two series were different from one another. The clear answer is that they were not. The results of the statistical tests combined with the fact that the average difference between the two (restated) return series has substantially narrowed (to approximately 60 basis points) in the more recent (1993–2001) period jointly suggest a seamless real estate market in which public- and private-market vehicles display a long-run synchronicity. This has important implications for portfolio management. First, public- and private-market vehicles ought to be viewed as offering investors a risk/return continuum of real estate investment opportunities. Second, while the "platform" did not matter in terms of observed return characteristics, the platform may matter with regard to liquidity, governance, transparency, control, executive compensation and so forth; an apparent clientele effect hints at these issues being valued differently by large and small investors.     

A Model of Time‐on‐Market and Real Estate Price Under Sequential Search with Recall

This article develops a model and provides a closed‐form formula to uncover the theoretical relationship between real estate price and time on market (TOM). Our model shows a nonlinear positive price‐TOM relationship, and it identifies three economic factors that affect the impact of TOM on sale price. We demonstrate that conventional metrics for real estate return and risk, which are borrowed in a naïve fashion from finance theory, do not account for marketing period risk and tend to overestimate real estate returns and underestimate real estate risks. Our model provides a simple way to correct such bias. This theory helps to explain the apparent “risk‐premium puzzle” in real estate.     

Optimal Selling Mechanism,Auction Discounts and Time on Market

This article examines the optimal selling mechanism problem in real estate market using mean‐variance analysis and downside risk analysis. When sellers can choose between accepting the first offer above a reservation price or auctions (waiting an optimal and fixed time), sellers having higher risk aversion choose auctions and wait a fixed time while sellers having lower risk aversion choose an optimal reservation price and wait a random time. Positive auction discounts are compensated by reduced risks, and there exists a connection between liquidity risk and conditional auction discount. More (Fewer) sellers will choose to sell their houses through auctions in a hot (cold) market or when holding cost increases (decreases). When sellers choose auctions, sellers having higher risk aversion who have lower holding cost wait longer and obtain higher sale price. Loss‐averse sellers unanimously choose the mechanism of setting an optimal reservation price.     

Credit Restrictions and the Market for Commercial Real Estate Loans

This paper develops a model of the market for commercial real estate loans based on the variables used by investors and lenders in property decision-making: the income capitalization (cap) rate, the debt-coverage ratio and the loan-to-value ratio. Empirical results for aggregate United States real estate originations and commitments for 1970–93 indicate that loan demand is sensitive to the cap rate and to building permit issuance. The dominant criterion used by lenders is the debt-coverage ratio as opposed to the loan-to-value ratio, a finding which may have implications for underwriting standards and credit policy.