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A Model of Time-on-Market and Real Estate Price Under Sequential Search with Recall

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  • Ping Cheng
  • Zhenguo Lin
  • Yingchun Liu
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    Abstract

    This article develops a model and provides a closed-form formula to uncover the theoretical relationship between real estate price and time on market (TOM). Our model shows a nonlinear positive price-TOM relationship, and it identifies three economic factors that affect the impact of TOM on sale price. We demonstrate that conventional metrics for real estate return and risk, which are borrowed in a naïve fashion from finance theory, do not account for marketing period risk and tend to overestimate real estate returns and underestimate real estate risks. Our model provides a simple way to correct such bias. This theory helps to explain the apparent "risk-premium puzzle" in real estate. Copyright 2008 American Real Estate and Urban Economics Association

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6229.2008.00231.x
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    Bibliographic Info

    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 36 (2008)
    Issue (Month): 4 (December)
    Pages: 813-843

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    Handle: RePEc:bla:reesec:v:36:y:2008:i:4:p:813-843

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    Cited by:
    1. Cheng, Ping & Lin, Zhenguo & Liu, Yingchun, 2010. "Illiquidity, transaction cost, and optimal holding period for real estate: Theory and application," Journal of Housing Economics, Elsevier, vol. 19(2), pages 109-118, June.
    2. Ping Cheng & Zhenguo Lin & Yingchun Liu, 2010. "Home Price, Time-on-Market, and Seller Heterogeneity Under Changing Market Conditions," The Journal of Real Estate Finance and Economics, Springer, vol. 41(3), pages 272-293, October.
    3. Egozcue, Martin & Fuentes García, Luis & Zitikis, Ricardas, 2012. "An optimal strategy for maximizing the expected real-estate selling price: accept or reject an offer?," MPRA Paper 40694, University Library of Munich, Germany.
    4. Cheng, Ping & Lin, Zhenguo & Liu, Yingchun, 2011. "Property delisting, housing cycle and pricing bias," Journal of Housing Economics, Elsevier, vol. 20(2), pages 152-157, June.
    5. İnaltekin, Hazer & Jarrow, Robert A. & Sağlam, Mehmet & Yıldırım, Yıldıray, 2011. "Housing prices and the optimal time-on-the-market decision," Finance Research Letters, Elsevier, vol. 8(4), pages 171-179.

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