IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Illiquidity, transaction cost, and optimal holding period for real estate: Theory and application

  • Cheng, Ping
  • Lin, Zhenguo
  • Liu, Yingchun
Registered author(s):

    Choosing the optimal holding period is an important part of real estate investment decisions, because "when to sell" affects "whether to buy". This paper presents a theoretical model for such decision making. Our model indicates that the optimal holding period is affected by both systematic and non-systematic factors--market conditions (illiquidity and transaction cost) and property performance (return and return volatility). Other things being equal, higher illiquidity and transaction costs lead to longer holding periods, while higher return volatility implies shorter holding periods. Our empirical application suggests that the optimal holding period based on our model is quite consistent with previous empirical findings. In addition, we find that when illiquidity risk is incorporated the true real estate risk is significantly higher than the conventional risk estimate. Therefore, the current practice of real estate valuation, which is naively borrowed from finance theory, substantially underestimates real estate risk.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/B6WJR-4YRPDS9-2/2/2aaf2ca03bd13249ee26e725bf96501f
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Housing Economics.

    Volume (Year): 19 (2010)
    Issue (Month): 2 (June)
    Pages: 109-118

    as
    in new window

    Handle: RePEc:eee:jhouse:v:19:y:2010:i:2:p:109-118
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622881

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August.
    2. Shaun A. Bond & Soosung Hwang, 2007. "Smoothing, Nonsynchronous Appraisal and Cross-Sectional Aggregation in Real Estate Price Indices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(3), pages 349-382, 09.
    3. Shaun Bond & Soosung Hwang & Zhenguo Lin & Kerry Vandell, 2007. "Marketing Period Risk in a Portfolio Context: Theory and Empirical Estimates from the UK Commercial Real Estate Market," The Journal of Real Estate Finance and Economics, Springer, vol. 34(4), pages 447-461, May.
    4. Ping Cheng & Zhenguo Lin & Yingchun Liu, 2008. "A Model of Time-on-Market and Real Estate Price Under Sequential Search with Recall," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 813-843, December.
    5. Gao, Andre & Lin, Zhenguo & Na, Carrie Fangzhou, 2009. "Housing market dynamics: Evidence of mean reversion and downward rigidity," Journal of Housing Economics, Elsevier, vol. 18(3), pages 256-266, September.
    6. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
    7. Brennan, M. J., 1975. "The Optimal Number of Securities in a Risky Asset Portfolio When There Are Fixed Costs of Transacting: Theory and Some Empirical Results," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(03), pages 483-496, September.
    8. William B. Brueggeman & Jeffrey D. Fisher & Jerrold J. Stern, 1981. "Federal Income Taxes, Inflation and Holding Periods for Income-Producing Property," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 9(2), pages 148-164.
    9. George W. Gau & Ko Wang, 1990. "Capital Structure Decisions in Real Estate Investment," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 501-521.
    10. Zhenguo Lin & Yingchun Liu, 2008. "Real Estate Returns and Risk with Heterogeneous Investors," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 753-776, December.
    11. Patric H. Hendershott & David C. Ling, 1984. "Trading and the Tax Shelter Value of Depreciable Real Estate," NBER Working Papers 1267, National Bureau of Economic Research, Inc.
    12. Quigley, John M., 1999. "The Valuation of Real Capital:A Random Walk down Kungsgatan," ERES eres1999_109, European Real Estate Society (ERES).
    13. James R. Webb & Willard McIntosh, 1986. "Real Estate Investment Acquisition Rules for REITs: A Survey," Journal of Real Estate Research, American Real Estate Society, vol. 1(1), pages 77-98.
    14. Kerry D. Vandell & Thomas Thibodeau, 1985. "Estimation of Mortgage Defaults Using Disaggregate Loan History Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 292-316.
    15. Young, Michael S & Graff, Richard A, 1995. "Real Estate Is Not Normal: A Fresh Look at Real Estate Return Distributions," The Journal of Real Estate Finance and Economics, Springer, vol. 10(3), pages 225-59, May.
    16. Zhenguo Lin & Kerry D. Vandell, 2007. "Illiquidity and Pricing Biases in the Real Estate Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(3), pages 291-330, 09.
    17. Pellechio, Anthony J., 1988. "Taxation, Rental Income, and Optimal Holding Periods for Real Property," National Tax Journal, National Tax Association, vol. 41(1), pages 97-107, March.
    18. Atkins, Allen B & Dyl, Edward A, 1997. " Transactions Costs and Holding Periods for Common Stocks," Journal of Finance, American Finance Association, vol. 52(1), pages 309-25, March.
    19. Chester Foster & Robert Order, 1985. "FHA Terminations: A Prelude to Rational Mortgage Pricing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 273-291.
    20. Lippman, Steven A & McCall, John J, 1986. "An Operational Measure of Liquidity," American Economic Review, American Economic Association, vol. 76(1), pages 43-55, March.
    21. David Collett & Colin Lizieri & Charles Ward, 2003. "Timing and the Holding Periods of Institutional Real Estate," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(2), pages 205-222, 06.
    22. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
    23. James R. Webb, 1984. "Real Estate Investment Acquisition Rules for Life Insurance Companies and Pension Funds: A Survey," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(4), pages 495-520.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jhouse:v:19:y:2010:i:2:p:109-118. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.