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A Model of Time‐on‐Market and Real Estate Price Under Sequential Search with Recall
Author(s) -
Cheng Ping,
Lin Zhenguo,
Liu Yingchun
Publication year - 2008
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1540-6229.2008.00231.x
Subject(s) - real estate , economics , price on application , capitalization rate , recall , financial economics , econometrics , real estate investment trust , finance , linguistics , philosophy
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.