6 Further Analysis Using Demand Indices
In theory, the perceived sluggish adjustment of direct real estate prices may be caused by
asymmetries in buyers’ and sellers’ responses to shocks in the fundamentals. In particular, in
search theoretic models where buyers are assumed to respond prior to sellers, sales volume is
expected to respond prior to prices to changes in the fundamentals (Berkovec and Goodman,
1996; Hort, 2000; Fisher et al., 2003). That is, if buyers react more rapidly than sellers,
changes in the demand for an asset are expected to lead returns on the asset. Clearly, given
the notable informational asymmetries in the direct real estate market, asymmetries in buyers’
and sellers’ responses are more likely in the direct real estate market than in the REIT market
where liquid assets are traded in a centralized market place. Therefore, the observed lead-lag
relationship between REIT returns and TBI returns might be due to the slow adjustment of the
supply side in the direct real estate market.
To gain further insight to the perceived lead-lag relations, we investigate the dynamics
of the sector level demand indices by Fisher et al. (2003 and 2007). The demand indices are
based on the same properties as the TBI indices and track the movements in buyers’
reservation prices. In other words, the demand indices show the development of the
“constant-liquidity value” of direct market real estate. Table 7 present descriptive statistics
regarding the demand indices. In line with the vast empirical evidence showing time-varying
liquidity in the direct real estate market, the volatility of demand changes is notably greater
than that of the TBI returns during the sample period. Expectedly, the constant-liquidity
indices appear to be stationary in differences just like the TBI returns - after all there should
not be any differences in the order of integration between the constant-liquidity indices and
the total return indices.
13
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