Shiller: Housing market not efficient enough to trust comps

From Robert Shiller in the NYT:

The Housing Market Still Isn’t Rational

Home prices have been climbing. They have risen 27 percent nationally since 2012, even more in places like San Francisco. But why worry? If you accept the efficient markets theory — and believe that real estate is an efficient market — then these prices are based on “new information,” even if you don’t know what that information is.

The problem with this kind of thinking is that the efficient markets theory is at best a half-truth, as a voluminous literature on market anomalies shows. What’s more, even that half-truth is grounded mainly in the stock market, which attracts professional investors who sometimes do make the market behave efficiently.

The housing market is another matter. It is far less rational than even the often irrational stock market, for a couple of important reasons. First, most investors find it difficult to understand how housing supply responds to changes in demand. Only a small minority of people think carefully about such things. Second, it is very hard for the minority of smart-money investors who do understand such matters to bet against bubble-level prices in real estate markets. In housing, the smart money has relatively little voice.

Short-selling helps prevent bubbles from forming, but such negative bets cannot easily occur in the housing market. You can’t routinely borrow a house and sell it, promising to buy back the same house later to repay the loan.

Markets without the possibility of making these negative bets will be inefficient. That’s because if it is not possible to short, the smart money can do no more than avoid holding an overpriced asset. Canny traders are forced to sit on the sidelines, and watch in futility as prices decline as they expected. Without short-sellers, there is nothing to stop a group of ignorant investors — who get some ill-conceived idea that a certain investment is just terrific — from bidding up prices to extravagant levels. In the housing market, that poses an enormous problem.

During the financial crisis, some professional investors did manage to profit by correctly forecasting home price declines. They used mortgage derivatives such as collateralized debt obligations to place their bets. John Paulson of Paulson & Company is well known for very successfully profiting from his prediction of trouble in the housing market. But mortgages are not homes, and he and others like him did not beat down the emerging housing bubble before it grew out of proportion.

The bottom line is that there is no reason to assume that the real estate market is even close to efficient. You may want to buy a house if you love it and can afford it. But remember that you cannot safely rely on “comparable sales” to judge that the price is fair. The market isn’t efficient enough for that.

This entry was posted in Economics, National Real Estate. Bookmark the permalink.

16 Responses to Shiller: Housing market not efficient enough to trust comps

  1. D says:

    Happy Weekend!

  2. NJT says:

    Snecond.

  3. 30 year realtor says:

    Interpreting real estate comparable sales is an art not a science. I have made my living making judgments based upon comparable sales for decades. Best you can hope for is an accurate bracket for your price. Pin point accuracy is not possible.

    When it comes to predicting trends, even if you can see the trend approaching timing it is impossible!

  4. Anon E. Moose says:

    Did someone say something about a GTG? Was the last one (on record) really in 2013? I’m game.

  5. NJT says:

    Funny thing (not really) about comps (in my experiances). They always came in lower than what I thought was realistic. I can only guess why.

    Did actually boot one RE agent out the door once (Yes, kicked her in the butt) back in 1995. Still makes my wife laugh! When she (the Agent) offered me a bridge loan and tried to compare my MINT Cape Cod to a summer bungalow. I so wanna mention her name… what a witch. Wouldn’t take no for an answer. We settled out of court for a pittance. STILL get a smile RE (pun intended) the incident.

    *Cops thought it was hilarious.

  6. Libturd at home says:

    Party at Otto’s house.

  7. Essex says:

    3. Realtor came in and tried to comp my home to a place nearby. I didn’t buy it for a second. Got another realtor.

  8. anon (the good one) says:

    @daemonic3:

    “I feel like 770,000 bucks!!”

    – A woman feeling like a million bucks

  9. phoenix says:

    Price of housing did not go up overnight. So 1960’s new house sells for 25k and sells for 425k old, beat up with original kitchen and bathroom.
    Sell house and move to FL, or NC like Marilyn.
    Take your real pension with you, private or public, still REAL pension.
    Take real Social Security with you.
    Take real Medicare with you.
    Profit.
    Then vote against anyone getting the same thing you are receiving.
    Let the new guy get a 401k, don’t touch my pension.
    Social Security and Medicare for anyone over 55 (me), voucher for younger group (you)
    Not only that, I am leaving you with my debt (underfunded pension, social security and medicare, old beat up bridges, roads, infrastructure that I abused for years and did not maintain as that would have required higher taxes which I voted against for years and years. Hey, I have to save for my retirement you know.
    You can have my old beat up house, my old beat up car, my old beat up bridge,
    my old beat up tunnel, etc.
    I’m out of here. You fool!! You paid top dollar for my old beat up house, and I stuffed you with the debt I refuse to pay for. I chose some great politicians over the years didn’t I !!!
    I’m Grandfathered!!
    So for those that complain about high taxes and high housing prices, one need not look farther than what is listed above……

  10. anon (the good one) says:

    yep, indeed, nicely put

    phoenix says:
    August 1, 2015 at 2:40 pm

    Price of housing did not go up overnight. So 1960′s new house sells for 25k and sells for 425k old, beat up with original kitchen and bathroom.
    Sell house and move to FL, or NC like Marilyn.
    Take your real pension with you, private or public, still REAL pension.
    Take real Social Security with you.
    Take real Medicare with you.
    Profit.
    Then vote against anyone getting the same thing you are receiving.
    Let the new guy get a 401k, don’t touch my pension.
    Social Security and Medicare for anyone over 55 (me), voucher for younger group (you)
    Not only that, I am leaving you with my debt (underfunded pension, social security and medicare, old beat up bridges, roads, infrastructure that I abused for years and did not maintain as that would have required higher taxes which I voted against for years and years. Hey, I have to save for my retirement you know.
    You can have my old beat up house, my old beat up car, my old beat up bridge,
    my old beat up tunnel, etc.
    I’m out of here. You fool!! You paid top dollar for my old beat up house, and I stuffed you with the debt I refuse to pay for. I chose some great politicians over the years didn’t I !!!
    I’m Grandfathered!!
    So for those that complain about high taxes and high housing prices, one need not look farther than what is listed above……

  11. leftwing says:

    Fairly scary article given the author. Especially in light of the quotes below. Looks like the ‘smart money’ is avoiding SFH risk and placing all their bets on multi. Work backwards from there. Nothing really good comes of it.

    “There is a way for smart money to profit from an understanding of high prices. It is to build new houses and sell them before prices fall.”

    “That same failure to anticipate how supply can respond to demand applies to many forms of real estate today. Developers and builders will, one way or another, exploit overpricing, increasing effective supply”

    “The Commerce Department said on Friday that housing starts in June climbed 9.8 percent to a seasonally adjusted annual rate of 1.17 million homes. All of that growth came from a 28.6 percent surge in multifamily housing that put apartment construction at its highest rate since November 1987. Starts for single-family houses slipped 0.9 percent last month.”

  12. Marilyn says:

    9 , only one difference with me, I did not make any profit on selling. In fact Im taking a loss. However even if I was making a profit and leaving , could you tell me whats wrong with that? I mean I would think that would be the best time to leave. The smart ones don’t want a reverse mortgage. The smart ones know they can see little grandkid once a year and fly. The smart ones who cant afford NJ do leave. Why be a burden on the system? I mean a know a lot of retired old people who left and could have had their taxes frozen to screw other taxpayers. I think sometimes getting rid of the ones like pumpkins says , the new ones will come in!!

  13. Marilyn says:

    ohh I see your point. Leave if you cant afford it!! Yup that’s true. Go live in a trailer in Northern GA and squeal like a pig.

  14. Marilyn says:

    Hey I paid plenty to the State of NJ. I have given more than I have ever taken. I don’t have kids and paid tons of taxes. I think you should be happy so many are leaving. Makes more room from the people of Westchester would love to come to Tenafly and pay those low taxes and vote Democratic. You should be thanking all those retires who are leaving. They did not freeze their taxes, and they made way for more Long Island , and Westchester folks. You win!! You should raise the taxes more and get more fox news watch angry white males to leave the State!

  15. Marilyn says:

    Ohh I love you guys. Its all said in a good natured way. Im leaving like a lot of police who get their pensions and go to Florida.

  16. A Home Buyer says:


    A CEO from Seattle has been forced to rent out his home after his business suffered when he raised the minimum wage to $70,000. Dan Price, 31, made headlines in the US three months ago when he made the decision to increase the salaries of all 120 staff members at his Gravity Payments credit card processing firm. However, the move, which included Mr Price taking a pay cut, has not ended well, with two employees resigning and several customers walking away as well as part of a backlash against the payrises.

    http://www.telegraph.co.uk/news/worldnews/northamerica/usa/11778597/CEO-who-set-firms-minimum-wage-at-70000-hits-hard-times.html

Comments are closed.