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Dissecting the 2007-2009 real estate market bust: systematic pricing correction or just a housing fad?

Author

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  • Daniele Bianchi

    (Bocconi University, Department of Finance, Milan)

  • Massimo Guidolin

    (Bocconi University, IGIER, and CAIR, Manchester Business School)

  • Francesco Ravazzolo

    (Norges Bank and BI Norwegian Business School)

Abstract

We use Bayesian methods to estimate a multi-factor linear asset pricing model characterized by structural instability in factor loadings, idiosyncratic variances, and factor risk premia. We use such a framework to investigate the key differences in the pricing mechanism that applies to residential vs. non-residential (such as office space, industrial buildings, retail property) real estate investment trusts (REITs). Under the assumption that the subprime crisis has had its epicentre in the housing/residential sector, we interpret any differential dynamics as indicative of the propagation mechanism of the crisis towards business-oriented segments of the US real estate market. We find important differences in the structure as well as the dynamic evolution of risk factor exposures across residential vs. non-residential REITs. An analysis of cross-sectional mispricings reveals that only retail, residential, and mortgage-specialized REITs were over-priced over the initial part of our sample, i.e., 1999-2006. Moreover, residential-driven real estate has structural properties that make it different from non-residential assets.

Suggested Citation

  • Daniele Bianchi & Massimo Guidolin & Francesco Ravazzolo, 2013. "Dissecting the 2007-2009 real estate market bust: systematic pricing correction or just a housing fad?," Working Paper 2013/22, Norges Bank.
    • Handle: RePEc:bno:worpap:2013_22
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    More about this item

    Keywords

    Multi-factor models; real estate; mispricing; real estate investment trusts;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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