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.     

Cross-Hedging: Basis Risk and Choice of the Optimal Hedging Vehicle

The basis between a futures contract and its underlying instrument is an important measure of the cost of using the futures contract to hedge. In a cross-hedge, the relative size of the basis of alternative hedging vehicles often plays a decisive role in the selection of the optimal hedging vehicle. After adjusting hedge ratios for basis risk, a genuine risk-cost trade-off is seen in hedging 90-day certificates of deposit with either the Treasury bill contract or the Eurodollar contract. The Eurodollar contract was not uniformly superior as generally believed.     

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.     

Reverse Mortgages and Borrower Maintenance Risk

This paper develops a theoretical model of the problem of maintenance risk in reverse mortgages (RMs) and home equity conversion instruments generally. By maintenance risk, we refer to the incentive homeowners will have to reduce maintenance expenditures as their equity in the house falls during the term of the RM. The underlying reason for this tendency is the limited liability feature of RMs, given that a borrower's obligation to the lender at. maturity is limited to the value of the house.
The results of the model show that lenders will respond to this problem either by limiting the amount of RM loans to guarantee that maintenance risk is not a threat, or by charging an interest rate premium to cover the expected cost of default. Unfortunately, there do not exist data to test the importance of maintenance risk as a possible limitation on the extent of the RM market.     

Grid analysis for sales supervision

Falling to recognize the unique need and desire of salespeople, the sales manager tends to allocate supervisory time according to the amount of his or her past selling experience. This time allocation results in either the excessive or insufficient supervision of sales personnel. This article describes a process of arriving at a more optimum allocation of supervisory time.     

Prospective Changes in Tax Law and the Value of Depreciable Real Estate

The Economic Recovery Tax Act of 1981 significantly reduced the taxation of income-producing properties by accelerating tax depreciation on both new and, especially, existing properties. A partial reversal of the 1981 legislation appears likely. To provide some insight into the possible effects of a decrease in tax depreciation of income-producing properties, two potential tax changes are analyzed: an increase from fifteen to twenty years in the tax service lives of both new and existing properties and an increase for existing properties only. Both residential and commercial/industrial properties are considered.     

On Option-Pricing Models in Real Estate: A Critique

This paper considers the problems peculiar to options on real estate, because of the special set of institutional factors influencing real estate markets. It is intended to serve as a reply to Johnson and Wofford [15] as well as provide an overall critique of option-pricing models in a real estate context. Our major point is that a variety of real estate decisions, such as the abandonment decision, the option to refinance, or the option to exercise a contingent real estate purchase contract, may be modeled using option-pricing techniques. However, both the theoretical and institutional aspects of real estate markets must be taken into account in both developing and applying option models in a real estate context.