Earlier this week, three Americans were awarded the Nobel prize for economics. According to the article I read about them in The Washington Post, their work has helped unify the theories behind asset pricing. Although I’m not a numbers geek, one of the winners has spent years studying housing markets, so I was very interested to learn about his work.
Robert Shiller, a professor at Yale, predicted that excessive optimism about future housing prices would drive present housing prices up way beyond traditional assessments relative to rental rates. This is exactly what happened in much of the U.S. during the mid-2000s. He also predicted that these irrational housing markets would be followed by a period of unusually low returns, or, to put it in lay terms, the housing bubble would burst. Again, he was correct.
With the nationwide housing bubble gone, and prices in Montclair and Glen Ridge quickly on the rise, it won’t be long before we see evidence of Shiller’s theory again. Because homes in the best suburbs of New York City will always be sought after, buyers are feeling confident about competing in multiple offer scenarios. This is what Shiller calls “irrational exuberance”– the belief that prices will continue to rise indefinitely, so the house can later be sold for even more money. Have we reached this point yet? -I don’t know but in the last couple of weeks, several homes have sold in multiple bids – some with as many as 7 or 8 offers. I wonder what Robert Shiller would have to say about that.