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The Role of Holding Periods in Repeat Sales Models

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  • Marc Francke

Abstract

The paper shows that the average periodic return decreases with the holding period, both for residential real estate in the Netherlands and England and Wales, as well as for commercial real estate in the United States: The longer the holding period is, the lower on average the periodic return is.The literature provides several reasons why the average periodic returns are higher for shorter holding periods. The first reason is the disposition effect: investors tend to sell more quickly a `winner' and to hold onto a lower-performing property longer. The second reason is that there might be improvements just after purchasing the property. The first implication of this finding is that the widely used repeat sales (RS) model is misspecified, because it does not differentiate between holding periods. The second implication is that systematic revisions in RS indices are due to the changing distribution of holding periods over time. This link has so far not been provided in the RS literature on index revision.This paper proposes an adjustment to the RS model by including dummy variables for each holding period, apart from a baseline holding period to avoid perfect collinearity. The estimated price index represents the left-out holding period. This model solves the misspecification issue. Moreover, it is shown that (systematic) index revisions are much smaller in RS models including holding period dummy variables compared to a standard RS model.

Suggested Citation

  • Marc Francke, 2018. "The Role of Holding Periods in Repeat Sales Models," ERES eres2018_270, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2018_270
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    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2018-270
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    File URL: https://eres.architexturez.net/system/files/P_20180131230459_320.pdf
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    References listed on IDEAS

    as
    1. Wang, Ferdinand T. & Zorn, Peter M., 1997. "Estimating House Price Growth with Repeat Sales Data: What's the Aim of the Game?," Journal of Housing Economics, Elsevier, vol. 6(2), pages 93-118, June.
    2. Goetzmann, William N & Spiegel, Matthew, 1995. "Non-temporal Components of Residential Real Estate Appreciation," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 199-206, February.
    3. Goetzmann, William Nelson, 1992. "The Accuracy of Real Estate Indices: Repeat Sale Estimators," The Journal of Real Estate Finance and Economics, Springer, vol. 5(1), pages 5-53, March.
    4. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(4), pages 1233-1260.
    5. Steele, Marion & Goy, Richard, 1997. "Short Holds, the Distributions of First and Second Sales, and Bias in the Repeat-Sales Price Index," The Journal of Real Estate Finance and Economics, Springer, vol. 14(1-2), pages 133-154, Jan.-Marc.
    6. R. Carter Hill & J. R. Knight & C. F. Sirmans, 1997. "Estimating Capital Asset Price Indexes," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 226-233, May.
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    Cited by:

    1. Robert J. Hill & Miriam Steurer, 2020. "Commercial Property Price Indices and Indicators: Review and Discussion of Issues Raised in the CPPI Statistical Report of Eurostat (2017)," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 66(3), pages 736-751, September.

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    More about this item

    Keywords

    holding period; index revision; property price indices; repeat sales;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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