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

31 Pages Posted: 2 Dec 2008

See all articles by Ping Cheng

Ping Cheng

Florida Atlantic University - Finance

Zhenguo (Len) Lin

Florida International University (FIU) - Hollo School of Real Estate

Yingchun Liu

Dept. of Finance, Insurance, Real Estate and Law, University of North Texas

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.

Suggested Citation

Cheng, Ping and Lin, Zhenguo and Liu, Yingchun, A Model of Time-on-Market and Real Estate Price Under Sequential Search with Recall. Real Estate Economics, Vol. 36, Issue 4, pp. 813-843, Winter 2008, Available at SSRN: https://ssrn.com/abstract=1308715 or http://dx.doi.org/10.1111/j.1540-6229.2008.00231.x

Ping Cheng (Contact Author)

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States
561-297-3456 (Phone)
561-297-3686 (Fax)

Zhenguo Lin

Florida International University (FIU) - Hollo School of Real Estate ( email )

Miami, FL 33199
United States
3057799248 (Phone)

Yingchun Liu

Dept. of Finance, Insurance, Real Estate and Law, University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

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