Shiller calls the real estate market inefficient and irrational in the article below – and I don’t know if we can even call it a market. Entry and exit takes weeks at best and are clumsy. You don’t know who, when, or how much until – and if – luck happens to find you. The entire game is rigged to encourage over-paying, so the conservative buyers have a hard time competing.
By Robert Shiller at nytimes.com – an excerpt:
http://www.nytimes.com/2015/07/26/upshot/the-housing-market-still-isnt-rational.html
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.
Read full article here:
http://www.nytimes.com/2015/07/26/upshot/the-housing-market-still-isnt-rational.html
There was a time when this guy first hit the scene that I liked him. Now he’s just a doof.
In the article he implied that “smartmoney” or those looking to pay less are getting tricked into paying more for a widget/house. Then in the next paragraph he calls the housing market less rational than the stock market. He’s talking out both sides of his mouth.
The reason the housing market is going up is 2 fold. Banks aren’t foreclosing, this limits the supply of houses buyers can buy and the fed is creating inflation by holding down interest rates. If one or both of these 2 variables change (not likely) house prices will go down.
Shadash:
“In the article he implied that “smartmoney” or those looking to pay less are getting tricked into paying more for a widget/house. Then in the next paragraph he calls the housing market less rational than the stock market. He’s talking out both sides of his mouth.”
I think he was saying smart money in the real estate market can’t time the downswing, which I’ve found to be true. I’m no economic expert, but I pay attention to charts, and the Schiller index led me to believe that the growth rate was unsustainable on a percentage basis in 2006. I thought that was the year everything would tank. I was wrong. I was generally right reading a simple chart, but dead wrong on the timing.
With all the government ghosts in the machine, it’s hard to tell when the market has run out of gas, because a lot of the process isn’t transparent, and elements that are can be… arbitrary.
In any case, if anyone asked me, I’d say right now is the time to buy, if you know what’s good for you, and you must own a house. I think things are about to get wacky again. Flippers get your flipping gloves on. The floodgates are open.
You recentlu posted another schiller video that i did enjoy and agree with about housing choice.
https://www.bubbleinfo.com/2015/06/29/shiller-on-housing/
There are different levels of “inefficient and irrational”, Try buying a place in Hollywood hills LOL.
The closer you are to the SoCal coast the MORE irrational it becomes.
Dallas TX (or most places in TX ) are probably a lot more Rational but I really don’t want to move there myself.
Hollywood Hills seems efficient and rational to me. The entertainment industry is booming. Rich people need housing. Development in the Hollywood Hills is limited. Prices go up.
Irrational and inefficient is paying 800K for a third-rate McMansion in Hesperia.
We’re not seeing that… yet.
If you took the average wage of Hollywood and try to justify the home prices it will come out looking VERY irrational on a chart.
That’s why we should throw out the average-wage argument as a metric – today’s market is driven by big down payments.