[KillerRabbitt]

There is an old story about a financial economist and passionate defender of the efficient markets hypothesis (EMH) who was walking down the street with a friend.

The friend stops and says, "Look, there is a $20 bill on the ground!"

The economist turns and coolly replies, "Can't be. If there was a $20 bill on the ground, somebody would have already picked it up."

[ouid]

I realize I'm analyzing a joke, but dollars on the street aren't assumed to exist in an arbitrage free economy because there aren't enough actors. The joke isn't saying that the theory is wrong, it's saying that the economist is wrong for applying it. In the case of housing markets, if anyone can borrow money to buy a house for less than they can make on renting that house, then there are enough people alive that they will do that.

Also, I should mention that this is the zero arbitrage principle and not the efficient market hypothesis. The efficient market hypothesis asserts that everything we know about the future value of a house is reflected in the current price of the house, which is also relevant to the discussion, but not what I was referring to.