Bubbles are always easy to call after the fact, but things are far less clear when you’re in one.
The fact that leading economists can’t even agree on whether real estate bubbles exist makes things even more challenging for the average home buyer who’s trying to make sense of the market.
The two competing views on real estate bubbles are by Nobel Laureates Eugene Fama and Robert Shiller – who somewhat ironically won the Nobel Prize for economics in the same year.
Eugene Fama vs Robert Shiller
[image source bbc]
What exactly is a bubble? Robert Shiller defines it as follows:
A situation in which news of price increases spurs investor enthusiasm which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase and bringing in a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.