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Asset-Level Risk and Return in Real Estate Investments
[New evidence on home prices from Freddie Mac repeat sales]

Author

Listed:
  • Jacob S Sagi
  • Stijn Van Nieuwerburgh

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.

Suggested Citation

  • Jacob S Sagi & Stijn Van Nieuwerburgh, 2021. "Asset-Level Risk and Return in Real Estate Investments [New evidence on home prices from Freddie Mac repeat sales]," The Review of Financial Studies, Society for Financial Studies, vol. 34(8), pages 3647-3694.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:8:p:3647-3694.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa122
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    Citations

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    Cited by:

    1. William N Goetzmann & Christophe Spaenjers & Stijn Van Nieuwerburgh, 2021. "Real and Private-Value Assets [Gendered prices]," The Review of Financial Studies, Society for Financial Studies, vol. 34(8), pages 3497-3526.
    2. Peter Chinloy & Cheng Jiang & Kose John, 2022. "Spreads and Volatility in House Returns," JRFM, MDPI, vol. 15(8), pages 1-16, August.
    3. Aleksandar Andonov & Roman Kräussl & Joshua Rauh & Stijn Van Nieuwerburgh, 2021. "Institutional Investors and Infrastructure Investing [Pension fund asset allocation and liability discount rates]," Review of Financial Studies, Society for Financial Studies, vol. 34(8), pages 3880-3934.
    4. Francisco Amaral & Martin Dohmen & Sebastian Kohl & Moritz Schularick, 2021. "Superstar Returns," SciencePo Working papers Main hal-03881493, HAL.
    5. Charles Ka Yui LEUNG, 2022. "Housing and Macroeconomics," ISER Discussion Paper 1197, Institute of Social and Economic Research, Osaka University.
    6. Korevaar, Matthijs, 2023. "Reaching for yield and the housing market: Evidence from 18th-century Amsterdam," Journal of Financial Economics, Elsevier, vol. 148(3), pages 273-296.
    7. Stefano Colonnello & Roberto Marfè & Qizhou Xiong, 2021. "Housing Yields," Working Papers 2021:21, Department of Economics, University of Venice "Ca' Foscari", revised 2021.

    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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