Shiller: Housing market will drop for a period of years

These are only short-run indicators, and they do not tell us a lot about the major correction in home prices that might be in store. The fact that home prices have risen so high relative to construction costs and other indicators suggests that home prices might fall back substantially in some markets -- and maybe that is what is going on. But one can hardly be sure about whether and when it will happen. It could take many years for new construction to completely close the unusual builders' profit opportunity created by high home prices, and many unpredictable things could happen over that time.

We are left with a deeply uncertain situation, but one in which it would seem that a sequence of price declines continuing for many years has some substantial probability of happening. Traditional finance theory has trouble reconciling even a semi-predictable sequence of price declines with basic notions of market efficiency. The situation we are facing is a reminder of the glaring inefficiencies and incompleteness of existing markets for residential real estate, and may be regarded as evidence that institutional changes will be coming in future years to fundamentally change the nature of these markets.