Norges Bank

Working Paper

Dissecting the 2007-2009 real estate market bust: systematic pricing correction or just a housing fad?

Daniele Bianchi, Massimo Guidolin, and Francesco Ravazzolo
Working Paper


We use Bayesian methods to estimate a multi-factor linear asset pricing model characterized by structural instability in factor loadings, idiosyncratic variances, and factor risk premia. We use such a framework to investigate the key differences in the pricing mechanism that applies to residential vs. non-residential (such as office space, industrial buildings, retail property) real estate investment trusts (REITs). Under the assumption that the subprime crisis has had its epicentre in the housing/residential sector, we interpret any differential dynamics as indicative of the propagation mechanism of the crisis towards business-oriented segments of the US real estate market. We find important differences in the structure as well as the dynamic evolution of risk factor exposures across residential vs. non-residential REITs. An analysis of cross-sectional mispricings reveals that only retail, residential, and mortgage-specialized REITs were over-priced over the initial part of our sample, i.e., 1999-2006. Moreover, residential-driven real estate has structural properties that make it different from non-residential assets.

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ISSN 1502-8143 (online)

Published 20 September 2013 09:55
Published 20 September 2013 09:55