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.Keywords: Efficient markets hypothesis, real estate market efficiency, housing market efficiency, DYMIMIC model and real estate, DYMIMIC model and housing market efficiencyThe common perception of real estate markets is that they are less efficient than financial markets. This would seem to be especially true for the housing market where many properties trade only infrequently, making it difficult for participants to determine "correct" prices. The unique characteristics of real property and the local orientation of the market, which require specialized knowledge of the factors that affect risk and return, also may contribute to inefficiency. Furthermore, transaction and financing costs as well as tax considerations make it difficult to exploit potentially profitable opportunities even if they can be identified.There is a growing literature testing for market efficiency using real estate databases. Previous researchers have taken one of two approaches when testing for market efficiency. Gau (1984Gau ( , 1985, Rayburn, Devaney, and Evans (1987), Mclntosh andHenderson (1989), andCase andShiller (1989) primarily use a forecasting approach, where an inability to predict future prices is interpreted as evidence supporting market efficiency. Linneman (1986), and Guntermann and Smith (1987) use a market model approach analogous to earlier tests of efficiency in securities markets. These studies generally find some evidence of market inefficiency but typically conclude that trading rules or strategies cannot be developed to earn abnormal rates or return either because of high transaction and information costs or because of the difficulty of accurately forecasting real estate prices.

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The research reported here uses regression analysis to analyze rent variations in a sample of apartment data from the Phoenix metropolitan area. Many of the variables used in hedonic price studies of houses are found to be significant in explaining variations in apartment rent. There are differences between hedonic studies of houses and apartments particularly with respect to common area features or amenities. The analysis of various submarkets also produced interesting results. Various uses can be made of the results of this and similar studies by appraisers (market-derived adjustments), property managers (setting rents) and feasibility analysts (the design of apartment projects). Copyright American Real Estate and Urban Economics Association.