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Federal Reserve Bank of San Francisco
Working Paper Series
Asset price declines and real estate market illiquidity: evidence from Japanese land values
John Krainer
Mark M. Spiegel
Nobuyoshi Yamori
Abstract

We develop an overlapping generations model of the real estate market in which search frictions and a debt overhang combine to generate price persistence and illiquidity. Illiquidity stems from heterogeneity in agent real estate valuations. The variance of agent valuations determines how quickly prices adjust following a shock to fundamentals. We examine the predictions of the model by studying price depreciation in Japanese land values subsequent to the 1990 stock market crash. Commercial land values fell much more quickly than residential land values. As we would posit that the variance of buyer valuations would be greater for residential real estate than for commercial real estate, this model matches the Japanese experience.


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John Krainer & Mark M. Spiegel & Nobuyoshi Yamori, Asset price declines and real estate market illiquidity: evidence from Japanese land values, Federal Reserve Bank of San Francisco, Working Paper Series 2004-16, 2005.
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Keywords: Real property ; Prices ; Japan
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