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How Does Appraisal Smoothing Bias Real Estate Returns Measurement?

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Abstract

This paper examines and clarifies several related issues about real estate return indexes. Specifically, even if real estate valuation smoothing exists at the individual property level, such errors may offset in the aggregate. Using data from commercial property appraisals and corresponding transactions, appraisal smoothing errors engender an underestimation of both the first and second moments for real estate returns. After correcting for these “underestimations,” real estate mean returns and the variance appear to be quite similar to those of stocks.

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Authors and Affiliations

  1. Fisher Center for Real Estate and Urban Economics, Haas School of Business, University of California at Berkeley, 602 Faculty Bldg., MC6105, Berkeley, CA, 94720-6105, USA

    Robert H. Edelstein

  2. Financial, Accounting and Real Estate, School of Hotel Administration, Cornell University, 442 Statler Hall, Ithaca, NY, 14852, USA

    Daniel C. Quan

Authors
  1. Robert H. Edelstein
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  2. Daniel C. Quan
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Correspondence to Robert H. Edelstein.

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Edelstein, R.H., Quan, D.C. How Does Appraisal Smoothing Bias Real Estate Returns Measurement?. J Real Estate Finan Econ 32, 41–60 (2006). https://doi.org/10.1007/s11146-005-5177-9

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  • DOI: https://doi.org/10.1007/s11146-005-5177-9

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