Shiller on the Housing Bubble

Originally, a familial connection to the Netherlands introduced me to Tulip Mania,
a 17th-century example of a financial bubble that reads like a
parable. Who would invest in a tulip
bulb, wondrous Caseshilleras the blooms themselves can be? As Burton Malkiel
documented well in his book titled “A Random Walk Down Wall Street,” many Dutch joined in the tulip phenomenon, and many lost fortunes large and small. Teaching the theory and practice of investment at the College of St. Catherine in recent years, I have made sure to visit this interesting chapter of Dutch and financial history with students.

There’s nothing Dutch or historic about the bubble now known as the housing and mortgage crisis. Robert Shiller’s assessment
of the flagging housing market concludes not just with pessimism but also recommendations about information in the real estate market. Here’s an excerpt of the article the economist (whose Case-Shiller
housing index
has gained fame in recent years) published in the latest Atlantic magazine:

We also need to get better—and more—information to
more-sophisticated investors and financial professionals. In real estate, one
important way of doing that is by further developing the financial market
rather than focusing only on regulating it or reining it in. For instance,
real-estate futures markets, which have existed since 2006 but are still in
their infancy, have the potential to tame future housing bubbles. Without them,
there is no way for skeptical investors who think they see a rising bubble to express
that opinion in the market, except by selling their own homes. If futures
markets grow, then any skeptic anywhere in the world could profit from a bubble
in, say, Las Vegas, by short-selling real estate there. Substantial short-selling would reduce
bubbles, and provide information to home builders, ratings agencies, and
others. In turn, builders, for instance, might not overbuild if they see that
most of the money in the futures markets is being bet on price declines.

Subsidized financial advice and the encouragement of
real-estate futures markets are just two examples of the sorts of actions that
could limit future bubbles. The larger point is that increasing the amount,
accessibility, and reliability of information about investments should be a high
priority for policy makers. Epidemiology suggests that even very small changes
to the transmission rate of a disease can make the difference between an
epidemic and a low-incidence disease. If better information inoculated even
relatively few people against boom thinking, that could prevent many bubbles
from rising.

Such an article is surely cold comfort to colleagues hit
hard in the architecture field and others, but these ideas belong in the debate
about how to proceed with mortgage industry reforms and housing market
stabilization. If pointing fingers at
anonymous speculators is the extent of the reform, the financial bubble will be
historic, but certainly not extinct.


  1. Very interesting. It seems to me that the per-unit and transaction costs of Real Estate acquisition would really get in the way of a balanced futures market developing. Corn is sold at something close to $7 a bushel now and oil is trading at about $125. Investors can buy those commodities in large quantities and easily hold them or break them up into smaller batches for re-sale.
    Not the case with Real Estate. Anyhow, a very interesting thought and I will think about it more.

  2. Morgan,
    It’s a bit unpopular to talk about the prospective benefits of securitizing real estate right now, considering the mortgage-backed security mess and market failure. Still, I think Shiller’s point is that creating more instruments (REITs? Others?) to facilitate short sales could add an important line of communication to the housing market.
    Thanks for commenting!