(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 213

188 PART 2 • Producers, Consumers, and Competitive Markets

E XA MPLE 5.8 THE HOUSING PRICE BUBBLE (II)
Informational cascades may help to
explain the housing bubbles that
occurred in the U.S. and other countries. For example, from 1999 to
2006, home prices in Miami nearly
tripled. Would it have been completely irrational to buy real estate
in Miami in 2006? In the years prior
to 2006, some analysts projected
large increases in the demand for
housing in Miami and other parts of
Florida, based in part on a growing number of
aging retirees that want to move to someplace
warm, and in part on an influx of immigrants with
family or other roots in Miami. If other investors acted on the belief that these analysts had
done their homework, investing might have been
rational.

Informational cascades may also help
explain the housing bubbles that took
place in other parts of the U.S., notably
Arizona, Nevada, and California. (See
Figure 5.11.) There, too, some analysts
had projected large increases in demand.
On the other hand, few analysts projected large demand increases in cities
like Cleveland (not exactly a retirement
paradise), and indeed such cities experienced little in the way of a bubble.
Was it rational to buy real estate in Miami in
2006? Rational or not, investors should have known
that considerable risk was involved in buying real

estate there (or elsewhere in Florida, Arizona,
Nevada, and California). Looking back, we now
know that many of these investors lost their shirts
(not to mention their homes).

500
450

Home Price Index of Cities

400
350
300
250
200
150
100
50
1987

1989

1991

1993

Los Angeles

1995

Miami

1997

1999
Year

2001

Las Vegas

2003

2005

New York

2007

2009

2011

Cleveland

F IGURE 5.11

S&P/CASE-SHILLER HOUSING PRICE INDEX FOR FIVE CITIES
The Index shows the average home price for each of five cities (in nominal terms). For some cities, the
housing bubble was much worse than for others. Los Angeles, Miami, and Las Vegas experienced some

of the sharpest increases in home prices, and then starting in 2007, prices plummeted. Cleveland, on the
other hand, largely avoided the bubble, with home prices increasing, and then falling, only moderately.