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Revisions in Granular Repeat Sales Indices

46 Pages Posted: 12 Aug 2017  

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB); Ortec Finance

David Geltner

Massachusetts Institute of Technology (MIT); MIT Center for Real Estate

Alex van de Minne

Massachusetts Institute of Technology (MIT)

Bob White

Real Capital Analytics (RCA)

Date Written: August 10, 2017

Abstract

Price indices based on repeat sales are the most widely used type of real estate index based on asset transaction prices. But such indices are particularly prone to revision. When a new period of transaction data becomes available and is used to update the repeat sales model, all past index values can potentially be revised. These revisions are especially problematical for commercial real estate (as compared to housing), because commercial transactions are relatively scarce and properties are heterogeneous, reducing estimation precision. From a methodological perspective, the magnitude of expected revisions is a particularly useful measure of the quality of the empirical index, as it directly reflects both the precision of the index and its practical usefulness in economic and business applications, since revisions themselves are problematical in practice. This paper focuses on random revisions for indexes in thin, commercial property markets, the type of market that is most challenging for empirical price indexing. We present multiple specifications of the repeat sales model, seeking to reduce revisions. With the objective of minimizing the expected magnitude of revisions, among the specifications we explore, the best result obtains from an index methodology that specifies the periodic returns as a first order autoregressive process, that also uses the periodic returns of an aggregate index as an explanatory variable for more granular indices, and that allows the variance parameters of the signal and the noise to be time-varying. In our small-sample test cases, this model reduces overall index revisions by more than 50%.

Keywords: Commercial Real Estate, Stochastic Volatility, Revisions, Bayesian Repeat Sales

JEL Classification: N9, R31, C32

Suggested Citation

Francke, Marc and Geltner, David and van de Minne, Alex and White, Bob, Revisions in Granular Repeat Sales Indices (August 10, 2017). Available at SSRN: https://ssrn.com/abstract=3016563

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

HOME PAGE: http://www.uva.nl/en/contact/staff/item/m.k.francke.html?f=francke

Ortec Finance ( email )

Orly Centre
Barajasweg 10
Amsterdam, 1043 CP
Netherlands
+ 31 20 7009 700 (Phone)
+ 31 20 7009 701 (Fax)

HOME PAGE: http://www.ortec-finance.com

David Geltner

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139
United States

MIT Center for Real Estate ( email )

77 Massachusetts Avenue
Cambridge, MA 02139
United States

Alex van de Minne (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Bob White

Real Capital Analytics (RCA) ( email )

110 Fifth Avenue
7th Floor
New York, NY 10011
United States

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