Understanding Systematic Risk in Real Estate Markets

52 Pages Posted: 28 Aug 2012

See all articles by Cristian Voicu

Cristian Voicu

Investment Technology Group

Michael Seiler

College of William and Mary - Finance

Date Written: September 26, 2011

Abstract

A one-factor pricing model is employed to investigate the internal consistency of single family home and professionally-managed property prices. The risk factor used here is the US real estate index, which has much stronger explanatory power than the S&P 500 index for real estate assets. Empirical tests with this model lead to several surprising results. First, portfolios of East Coast or West Coast cities have negative risk-adjusted returns (alpha), while a portfolio of all inland cities has positive alpha. Second, a momentum strategy does not outperform the US real estate index on a transaction and risk-adjusted basis, despite its ability to pick the largest-growth cities. Third, high-beta cities have negative alpha, while low-beta cities have positive alpha, even after considering transaction costs. Fourth, high rental yield cities have positive alpha and vice-versa, even after transaction costs. Fifth, large cities have negative alpha, while small cities have positive alpha. Finally, expensive cities have negative alpha and vice-versa. A possible explanation for these abnormal returns is that some cities are systematically neglected by investors.

Suggested Citation

Voicu, Cristian and Seiler, Michael, Understanding Systematic Risk in Real Estate Markets (September 26, 2011). Available at SSRN: https://ssrn.com/abstract=2136616 or http://dx.doi.org/10.2139/ssrn.2136616

Cristian Voicu

Investment Technology Group ( email )

44 Farnsworth Street
9th Floor
Boston, MA 02210
United States

Michael Seiler (Contact Author)

College of William and Mary - Finance ( email )

VA
United States

HOME PAGE: http://mason.wm.edu/faculty/directory/seiler_m.php

Register to save articles to
your library

Register

Paper statistics

Downloads
171
Abstract Views
861
rank
173,990
PlumX Metrics