Restricting Wall Street from the U.S. Housing Market is a Bad Idea

Informational Efficiency’s Impact on Price and Risk

Stocks and bonds are financial assets, and our homes are as well. While many might not think of housing as a financial asset, it is as housing prices are driven by the potential for future rents.

Pricing financial assets, inclusive of housing, benefits from increased informational efficiency. As more and wiser investors enter the market (housing in this case) prices become more stable. This stability benefits all by reducing uncertainty or variation in prices.

A housing market with free entry and exit for Wall Street investors allows for the professionalization of housing prices as professional investors worry both about value and risk. The second element of risk is rarely directly considered by individual households but foremost on the minds of professional investors.

 With the free entry and exit by professional investors in the housing market, home prices will reflect investor knowledge, and all U.S. households will benefit from this extra layer of knowledge. With this model, sold prices will now reflect a greater understanding of both prices and risk. 

Informational Efficiency’s Impact on Housing Inventory

A more informationally efficient housing market (one with free entry and exit for all) will attract more capital. Growing levels of capital will increase the amount of housing inventory. The opposite is true for a less informationally efficient housing market and will result in less inventory.

In this time of inventory shortage, it does not seem wise to restrict Wall Street investors and their capital from the housing market. In fact, going forward, a more informationally efficient housing market with the presence of professional investors should allow for a better control of the needed level of inventory at any point in time, making significant swings in home prices less likely.

Conclusion 

Another way to look at this argument is to imagine the restriction of professional investors from the stock market. The immediate impact on stock prices would be dramatic -- stock prices would become unstable, pension fund values would contract significantly, and the availability of funds to invest in new highly productive ideas would all but dry up.

Few would support this proposal as it is clearly wealth-destroying. With that in mind, why would we want to restrict Wall Street from the U.S. housing market? 

 Banning Wall Street from the U.S. housing market will make the achievement of the American dream of homeownership for the average U.S. household more  difficult. Thus, restricting Wall Street investors from the U.S. housing market is a monumentally bad idea.

Contacts:
Bennie Waller, Ph.D.
William Cary Hulsey Faculty Fellow
University of Alabama
bdwaller@ua.edu 

and

Ken Johnson, Ph.D.
Christie Kirkland Walker Chair of Real Estate
University of Mississippi
khjohns3@olemiss.edu