Is the big rebound in housing rational? Perhaps not

Robert Shiller says prices can mislead buyers and sellers in an inefficient market like housing

TRD MIAMI /
Jul.July 25, 2015 04:47 PM

Home prices have rebounded. They are up 27 percent nationwide since 2012 and even more in cities like San Francisco.  Do you worry about another bubble in the making? Not if you believe the classical efficient market theory that prices embody all available information about a particular asset, so higher home prices must reflect “new information,” even if you’re unaware of it.

But this type of thinking is half right, at best. Housing defies the efficient market theory, a hypothesis prevalent in the stock market, which does sometimes exhibit efficient behavior.

Economist Robert Shiller asserts that the housing market is much less rational than the stock market. He is co-founder of the widely watched S&P/Case-Shiller Home Price Index.

In a 2013 presentation at a convention of the American Economic Association, Edward L. Glaeser of Harvard University showed that real estate investors throughout history repeatedly have ignored the supplier response to increasing prices. In Alabama, for example, a cotton farmland boom from 1815 to 1819 ended when increased cotton production deflated land prices.

Edward M. Miller noted in a 1977 article in the Journal of Finance that a market cannot be efficient unless short  selling is possible.

In the stock market, for example, short sellers make money by betting correctly that stock prices will fall. But without short selling, smart investors who foresee price declines cannot profit from their foresight, except by avoiding investment in an unpromising asset class. And in the absence of short sellers,  little can prevent optimistic but uninformed investors from overvaluing an asset class, as happened in the housing market prior to the downturn of the late 2000s. [New York Times] Mike Seemuth


Related Articles

arrow_forward_ios
Rendering of Belmont Village Coral Gables and Baptist Health South Florida CEO Brian L. Keeley

Baptist, Belmont gain approval for luxury senior living in Coral Gables

Baptist, Belmont gain approval for luxury senior living in Coral Gables
9885 Palomino Drive (Credit: Google Maps)

Resort Lifestyle Communities scores $36M construction loan for Lake Worth senior housing project

Resort Lifestyle Communities scores $36M construction loan for Lake Worth senior housing project
5010 Nob Hill Road (Credit: Google Maps)

Sunrise affordable senior housing facility sells for $30M

Sunrise affordable senior housing facility sells for $30M
Mark Zilbert

Let’s make a deal? Some resi sellers in Miami-Dade slash asking prices

Let’s make a deal? Some resi sellers in Miami-Dade slash asking prices
(Credit: iStock)

Home sales dropped big time in South Florida in April

Home sales dropped big time in South Florida in April
 Rendering of Father Marquess-Barry Apartments with Matt Rieger

HTG scores financing for senior affordable housing in Overtown

HTG scores financing for senior affordable housing in Overtown
Renderings of different versions of the project with Matt Rieger

HTG plans 1,000-unit affordable housing complex in Miami’s Overtown

HTG plans 1,000-unit affordable housing complex in Miami’s Overtown
Pharrell Williams (Credit: Ethan Miller/Getty Images)

South Florida by the numbers: Bright spots in a challenging market

South Florida by the numbers: Bright spots in a challenging market
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...