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The Impact of Market Imperfections on Real Estate Returns and Optimal Investor Portfolios

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  • Crocker H. Liu
  • Terry V. Grissom
  • David J. Hartzell

Abstract

This study investigates the consequences of several imperfections associated with real estate markets on pricing and optimal investor portfolios from a CAPM context. CAPM assumptions are relaxed to recognize illiquidity, the consumption and investment attributes of owner‐occupied housing, and a mildly segmented market structure. The study finds that relaxing the CAPM assumptions lead to a separate pricing paradigm for financial assets, income‐producing real estate and owner‐occupied housing respectively, that a “dividend effect” arises for real estate as the result of illiquidity, and that illiquidity reduces the extent to which investors hold real estate in their portfolios.

Suggested Citation

  • Crocker H. Liu & Terry V. Grissom & David J. Hartzell, 1990. "The Impact of Market Imperfections on Real Estate Returns and Optimal Investor Portfolios," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 453-478, December.
    • Handle: RePEc:bla:reesec:v:18:y:1990:i:4:p:453-478
    DOI: 10.1111/1540-6229.00532
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    Cited by:

    1. Zahra Saderion & Barton Smith & Charles A. Smith, 1994. "An Integrated Approach to the Evaluation of Commercial Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 9(2), pages 151-168.
    2. Manya M. Mooya & Chris E. Cloete, 2007. "Informal Urban Property Markets and Poverty Alleviation: A Conceptual Framework," Urban Studies, Urban Studies Journal Limited, vol. 44(1), pages 147-165, January.
    3. Manya M. Mooya, 2009. "Market Value without a Market: Perspectives from Transaction Cost Theory," Urban Studies, Urban Studies Journal Limited, vol. 46(3), pages 687-701, March.
    4. Patric H. Hendershott, 1997. "Uses of equilibrium models in real estate research," Journal of Property Research, Taylor & Francis Journals, vol. 14(1), pages 1-13, January.
    5. Gavin A. Wood & Peter A. Kemp, 2003. "The Taxation of Australian Landlords: Would the British Tax Treatment of Rental Investments Increase Tax Burdens if Introduced in Australia?," Urban Studies, Urban Studies Journal Limited, vol. 40(4), pages 747-765, April.
    6. Kim, k. & Suh, s. & Feridun, M., 2006. "Real State Business Cycle and Real Estate Policies: The Case of Korea," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 6(1).
    7. Patrick S. Smith & Crocker H. Liu, 2020. "Institutional Investment, Asset Illiquidity and Post‐Crash Housing Market Dynamics," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(3), pages 673-709, September.

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