Asset-Level Risk and Return in Real Estate Investments

New evidence on home prices from Freddie Mac repeat sales

Jacob S Sagi and Stijn Van Nieuwerburgh

The Review of Financial Studies, 2021, vol. 34, issue 8, 3647-3694

Abstract: In stark contrast with liquid asset returns, commercial real estate idiosyncratic return means and variances do not scale with the holding period, even after accounting for all cash flow-relevant events. This puzzling phenomenon survives controlling for vintage effects, systematic risk heterogeneity, and a host of other explanations. To explain the findings, I derive an equilibrium search-based asset-pricing model that, when calibrated, provides an excellent fit to transactions data. A structural model of transaction risk seems crucial to understanding real estate price dynamics. These insights extend to other highly illiquid asset classes, such as private equity and residential real estate.

JEL-codes: D40 G12 R30 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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