Have U.S. Financial Institutions' Real Estate Investments Exhibited "Trend-Chasing" Behavior?

Abstract

This paper uses real estate investment data for major groups of U.S. financial institutions--- commercial banks, thrifts and life insurance companies to evaluate their investment timing performance over the 1970-1989 period. Our finding is that real estate investments by these institutions have largely been driven by ex post or past real estate returns rather than future expected returns. This apparent “trend-chasing” investment strategy---of buying high and selling low---offers an explanation for the poor performance in their real estate investments. We argue that imposing market value accounting on such institutions may actually reinforce their “trend-chasing” behavior.