Stationarity and cointegration in systems with real estate and financial assets

This study examines the properties of wealth indices for investments in sev eral asset classes (real estate, stocks, bonds, and Treasury bills), for se veral types of real estate (office, retail, research and development office , and warehouse), and by region (East, Midwest, South, and West). The serie s representing the value of investments in real estate and financial assets are not stationary; therefore, ordinary statistical procedures cannot be a pplied. Since many of the properties that are included in the real estate s eries have outside appraisals on an annual basis, especially in the fourth quarter, the real estate series may show seasonal influences. Hence, the ap propriate test for cointegration is the Johansen's test, which is formulate d in such a way as to allow for deterministic seasonality by the inclusion of seasonal dummy variables. The finding of cointegration implies that ther e is a long-run relationship between the series in the cointegrated system. When the CPI (or a proxy for inflation) is included in the three systems, the number of common factors increase to two, implying that inflation plays an important role in creating a linkage between these time series. These f indings also have implications for developing portfolios comprising financi al assets and real estate. The findings also have implications for developi ng a model to forecast real estate prices.