Controlling for the Impact of Variable Liquidity in Commercial Real Estate Price Indices

Abstract

Liquidity in private asset markets is notoriously variable over time. Therefore, indices of changes in market value that are based on asset transaction prices will systematically reflect intertemporal differences in the ease of selling a property. We define and develop a concept of "constant-liquidity value" in the context of a model that is characterized by pro-cyclical volume of trading. We then present an econometric model that allows for estimation of both a standard transaction-based price index and a constant-liquidity index. Our application to the NCREIF database reveals that, in the case of institutional commercial real estate investment, constant-liquidity values tend to lead transaction-based and appraisal-based indices in time, and also to display greater volatility and cycle amplitude. The differences can be significant for strategic investment policy viewed from a mean-variance portfolio optimization perspective. Copyright 2003 by the American Real Estate and Urban Economics Association

Revisiting supply and demand indexes in real estate

“…The first and most widely employed technique for constructing separate demand and supply reservation price indexes in real estate was pioneered by Fisher et al (2003Fisher et al ( , 2007.…”

“…In order to apply the Fisher et al (2003Fisher et al ( , 2007 method in a repeat sales framework, we adapt the sample selection methodology for repeat sales models developed by Gatzlaff and Haurin (1997). Perhaps even more importantly, our methodology allows us to esti-mate supply and demand indexes at a much more granular level, in part because it allows us to use the much larger RCA database.…”

“…To do so, we further develop and extend the Fisher et al (2003Fisher et al ( , 2007 methodology to a repeat sales indexing framework. This has the advantage that it takes care of all unobserved heterogeneity, which is an important consideration in commercial real estate.…”

Information and Search on the Housing Market: An Agent-Based Model

“…Fisher et al (2003) studied the correlations in prices and liquidity changes over the housing market cycle. Clayton et al (2008) examined a number of possible explanations of the correlations in price and liquidity changes, and found evidence supporting sellers slow rate for updating their beliefs.…”

“…The role of information in the context of a dynamic evolution of real estate markets is an important subject that has already been analysed empirically by Fisher et al (2003); Clayton et al (2008). In order to examine this question we introduce exogenous shocks to the discount rate.…”