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This study investigates the consequences of several imperfections associated with real estate markets on pricing and optimal investor portfolios from a CAPM context. CAPM assumptions are relaxed to recognize illiquidity, the consumption and investment attributes of owner-occupied housing, and a mildly segmented market structure. The study finds that relaxing the CAPM assumptions lead to a separate pricing paradigm for financial assets, income-producing real estate and owner-occupied housing respectively, that a “dividend effect” arises for real estate as the result of illiquidity, and that illiquidity reduces the extent to which investors hold real estate in their portfolios.


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© Wiley. Final version published as: Liu, C. H., Grissom, T. V., & Hartzell, D. J. (1990). The impact of market imperfections on real estate returns and optimal investor portfolios. Real Estate Economics, 18(4), 453-478. DOI: 10.1111/1540-6229.00532. Reprinted with permission. All rights reserved.