Asset Price Persistence and Real Estate Market Illiquidity: Evidence from Japanese Land Values

26 Pages Posted: 4 Jun 2010

See all articles by John Krainer

John Krainer

Board of Governors of the Federal Reserve System

Mark M. Spiegel

Federal Reserve Bank of San Francisco - Economic Research Department

Nobuyoshi Yamori

Kobe University - Research Institute for Economics & Business Administration

Abstract

We develop an overlapping generations model of the real estate market in which search frictions and a debt overhang combine to generate price persistence and illiquidity. Illiquidity stems from heterogeneity in agent real estate valuations. The variance of agent valuations determines how quickly prices adjust following a shock to fundamentals. We examine the predictions of the model by studying price depreciation in Japanese land values subsequent to the 1990 stock market crash. Commercial land values fell much more quickly than residential land values. As we would posit that the variance of buyer valuations would be greater for residential real estate than for commercial real estate, this model matches the Japanese experience.

Suggested Citation

Krainer, John and Spiegel, Mark M. and Yamori, Nobuyoshi, Asset Price Persistence and Real Estate Market Illiquidity: Evidence from Japanese Land Values. Real Estate Economics, Vol. 38, Issue 2, pp. 171-196, Summer 2010, Available at SSRN: https://ssrn.com/abstract=1612466 or http://dx.doi.org/10.1111/j.1540-6229.2010.00264.x

John Krainer (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mark M. Spiegel

Federal Reserve Bank of San Francisco - Economic Research Department ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3184 (Phone)
415-974-2168 (Fax)

HOME PAGE: http://www.frbsf.org/economics/economists/mspiegel.html

Nobuyoshi Yamori

Kobe University - Research Institute for Economics & Business Administration ( email )

2-1, Rokkodai cho
Nada-ku
Kobe, 657-8501
Japan

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