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An Anatomy of Price Dynamics in Illiquid Markets: Analysis and Evidence from Local Housing Markets

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Author Info
Dennis R. Capozza
Patric H. Hendershott
Charlotte Mack
Abstract

This research analyzes the dynamic properties of the difference equation that arises when markets exhibit serial correlation and mean reversion. We identify the correlation and reversion parameters for which prices will overshoot equilibrium ("cycles") and/or diverge permanently from equilibrium. We then estimate the serial correlation and mean reversion coefficients from a large panel data set of 62 metro areas from 1979 to 1995 conditional on a set of economic variables that proxy for information costs, supply costs and expectations. Serial correlation is higher in metro areas with higher real incomes, population growth and real construction costs. Mean reversion is greater in large metro areas and faster growing cities with lower construction costs. The average fitted values for mean reversion and serial correlation lie in the convergent oscillatory region, but specific observations fall in both the damped and oscillatory regions and in both the convergent and divergent regions. Thus, the dynamic properties of housing markets are specific to the given time and location being considered. Copyright 2004 by the American Real Estate and Urban Economics Association

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1080-8620.2004.00082.x
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Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 32 (2004)
Issue (Month): 1 (03)
Pages: 1-32
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Handle: RePEc:bla:reesec:v:32:y:2004:i:1:p:1-32

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  1. Patric Hendershott & Robert J. Hendershott & Bryan D. MacGregor, 2005. "Evidence on Rationality in Commercial Property Markets: An Interpretation and Critique," NBER Working Papers 11329, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. John Krainer & Mark Spiegel & Nobuyoshi Yamori, 2005. "Asset price declines and real estate market illiquidity: evidence from Japanese land values," Working Paper Series 2004-16, Federal Reserve Bank of San Francisco. [Downloadable!]
  3. Jan Rouwendal & Simonetta Longhi, 2007. "The Effect of Consumers' Expectations in a Booming Housing Market," Tinbergen Institute Discussion Papers 07-078/3, Tinbergen Institute. [Downloadable!]
  4. Gianluca Marcato & Charles Ward, 2006. "Back from Beyond the Bid-Ask Spread: Perspectives on Liquidity," Real Estate & Planning Working Papers rep-wp2006-15, School of Business, Reading University. [Downloadable!]
  5. David E. Frame, 2008. "Regional Migration and House Price Appreciation," International Real Estate Review, Asian Real Estate Society, vol. 11(1), pages 96-112. [Downloadable!] (restricted)
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