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This paper reviews the literature on price determination in the private and public real estate markets. In particular, it discusses the processes of appraisal smoothing in the private market and of price discovery between the public and the private markets. In real estate markets, the absence of good quality information on price, whether because of lack of trades or confidentiality, has led to the widespread use of appraisals for market tracking and as the basis for performance measurement. Appraisers have to make an optimum assessment of value, based on fundamental variables and market information, including transactions and a market-wide appraisal index. However, transaction prices are a noisy signal and it is the appraiser's role to extract the signal from the noise in an efficient manner. This involves a process of optimal combination of past and current information and leads to appraisal smoothing. Price discovery is the process by which the opinions of market participants about the value of an asset are combined together into a single statistic—its market price. A development of this basic concept is where two markets have a common component of value and the relevant price information is discovered first in one market and then transmitted to the second market. The process of price discovery is considered between the public and private real estate markets.

We thank seminar participants at the Universities of Southern California and Wisconsin for their helpful comments.