Economics

Shiller's Ode To Jacked-Up Prices

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Robert Shiller, co-creator of the Case-Shiller housing index, tells the Motley Fool's Jennifer Schonberger that a yearlong "boom" in house prices (who knew?) may go bust again as the battery of government supports for real estate winds down:

Shiller: …Home prices have been going up for nearly a year now, according to our data, the S&P/Case-Shiller indices … Normally we could extrapolate that kind of upward trend because historically home prices have shown a lot of momentum. But I think we're in a very unusual circumstance because of the massive bailouts, the homebuyer tax credits, the Fed's purchase of mortgage-backed securities—and these things are coming to an end. So it's an unusual period. So I don't trust the trend that we have. I'm worried that it might get reversed….

Schonberger: What are the chances for a double dip in the housing market now?

Robert Shiller orders up a double dip of rocky road.

Shiller: It's hard to quote probability because people who do that rely on statistical analysis and past data … If you just looked at the trend of home prices you might conclude the probability is very low. We're less than a year into this boom, and booms have lasted much longer than that. That's why it's very hard to compute probabilities. But I think that it doesn't look real. It doesn't look like this is really another boom like the one that we had in the 2000s.

Schonberger: What does this mean for the economic recovery and the sustainability of the recovery?

Shiller: Well housing and construction expenditures have typically been 4 to 6% of GDP, and they're very depressed right now. It means that that component may not be coming back. But I think it goes beyond that. In many ways the housing situation is part of our impressions as to what is going on and so it has an impact on confidence, which is hard to quantify again, but I think potentially very real.

Schonberger: Where are we in the cycle for commercial real estate?

Shiller: It's still negative. The latest data that I've seen has shown price declines. We still have a financing problem. Of course that's intertwined. The reason that lenders don't want to renew loans for commercial real estate is that they see prices falling and so they don't want to give the same terms….

Schonberger: Thomas Hoeing, president of the Kansas City Fed, is worried about a new asset-price bubble, given low rates. Do you agree, or will rates go up without the Fed's doing because of deficit concerns?

Shiller: We have had kind of a mini-bubble in the stock market and the housing market. It wasn't just because of rate cuts. It was also because of government stimulus and bailouts. So the question is: Are we at risk for even more price increases, and another bubble? I think we are at risk, but I'm not predicting it. I think it's more likely we don't do so well from here.

Here's more support for Shiller's bearish view on commercial real estate.

OK, temporary house inflation does make sense if you're trying to keep a dog from getting crushed.

I have great respect for Shiller's encyclopedic grasp of the previous decade's bubble, but the last time we checked in with him, he was making a strong case for exactly the bailouts, tax credits, and MBS purchases he now implies have created a false dawn. Shiller says these interventions are important for preserving our "national identity." It must be nice to speak for the nation, but how about speaking for your own research? If a big part of my reputation were wrapped up in a highly regarded price index, I'd be a little pissed off at the likelihood that that index has been registering a bogus uptick for the past year because Washington has been gaming the market. (True, it's not the index keeper's fault that prices act crazy, but people do blame the weatherman for the weather.)

And in broader economic terms, the kind of price supports Shiller endorses fail the pulling-off-the-band-aid test. What purpose, other than narrow and short-term political gain, is served by stretching out the time before the market hits bottom? If Shiller were getting manscaped (nothing gay—just, you know, getting a little back hair taken off, because who wants to look like a gorilla?) would he prefer that they pull off the wax slowly or all at once?

Real estate market interventions certainly don't help home buyers who would be better off with a natural drop in prices. They don't help homeowners who would be better off having some idea when the value of their house bottoms out. They might provide a brief advantage to home sellers who are looking to unload an asset they know is about to take another swan dive; but you know, Goldman Sachs is getting sued for that kind of thing right now.

Courtesy of Calculated Risk.

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  1. Shiller were getting manscaped (nothing gay — just, you know, getting a little back hair taken off, because who wants to look like a gorilla?) would he prefer that they pull off the wax slowly or all at once?

    By your measure and the measure Shiller is making one would have to call the computer market permanently depressed. ie prices dropping.

    Not that the future holds forever falling home prices, but is such an imagined future so distopian?

    Are cheap houses so very very bad?

    1. Are cheap houses so very very bad?

      Yes, it is a human right to have asset prices which go up forever and ever. Whatever amounts of government credit and central bank largesse are required to achieve this outcome should be pursued without limit.

      1. Hey, but it works out OK. All you commoners who don’t have any real estate have the right to live in rent-controlled tenements.

      2. But wait! I thought affordable housing was a human right too?

    2. Deflation is the natural state of things.

      Increase in productivity = falling prices

      hence, computers get cheaper

    3. I’ve written enough on this topic that it should be clear I think it’s fine for houses to go down in price.

      I’m referring to popular references to the “pain” homeowners experience when the market cools off.

      I also don’t think you should use “hopefully” as a sentence modifier, but since that is a tiny-minority position, there’s no point in stickling about that either.

  2. well,thank you for share your article
    so wonderful

  3. The Reason girl is smiling! She looks much better now. Which one of you is responsible?

    1. she’s smiling cuz’ she knows folks like me will buy that shirt and actually wear it out in public.

      1. And here I thought she was smiling at me.

        1. Huge Erection,It isn’t a great sign when women laugh;-)

    2. Which one of us? Women don’t kiss and tell;-)

    3. Yes – but no alt-text. WE NEED THE ALT-TEXT!!!

  4. The donor’s trust guy still looks baffled. Maybe it is because no one is giving him any money.

  5. Gold! It’s the investment that goes up, never down!

  6. Goldman is not being sued for trying to get out of an asset it expected would go down. People do that all the time. It’s called profit-taking and if it didn’t happen you’d have no markets. Goldman structured long investments with the help of a materially interested third-party who was making the short bet – and failed to disclose this fact. The last bit is the important one.

    On Shiller: I see no inconsistency in supporting bail-outs and stimulus and then identifying or speculating about the effect said interventions are having on markets. As far as I can tell Shiller isn’t making some kind of moral judgment on the mini-bubble; he’s just saying that prices today are probably not a reliable indicator of market momentum.

  7. Goldman structured long investments with the help of a materially interested third-party who was making the short bet – and failed to disclose this fact.

    Alternative explanation: Paulsen was one of the few investors who wanted to take the short side of the mortgage market. Many wanted to take the long side (Goldman had buyers lined up to go long on mortgages), and were happy to buy mortgage pools initiated by Paulsen, because they couldn’t go long unless somebody, somewhere, went short.

    Everybody who took the other (long) side of Paulsen’s trade knew someone was taking the short side.

    I predict that the SEC will fail to prove any fraud, especially given the alleged sophistication of the parties.

    1. Not only that, but the marketing materials for Abacus stated that Goldman could hold short positions in it. I agree the SEC probably won’t prove fraud, and in my original post noted that that’s why Uncle Sam went civil rather than criminal.

      Still, not revealing that an outside short seller actually selected the portfolio seems to be, well, conduct unbecoming a gentleman. It was too ungentlemanly for Bear Stearns, and that’s saying something.

      It would be nice if people would take away from this that Goldman is not the High-Class House of Class and Classiness it claims to be, but if the garbage they were underwriting during the dotcom period didn’t prove that, I guess nothing will.

      1. Still, not revealing that an outside short seller actually selected the portfolio seems to be, well, conduct unbecoming a gentleman.

        But this isn’t what happened. The outside short (Paulson) merely selected the menu of bonds they were willing to go short. The long positions (ACA) then chose from that menu to make the portfolio.

        There is simply no way ACA can colorably claim they were duped as to the contents of the portfolio.

        And the fact the GS has a short lined up to bet against them? Well, duh. They were buying synthetic fucking CDOs; for the things to exist someone had to take the other side of the bet.

    2. Um, you can go long a mortgage bond without someone taking the short position. You just buy it. Paulson, however, couldn’t go short in the way he wanted – selectively and efficiently against the most crappiest of the crap – unless these could be packaged into a simple long investment. Hence, the synthetic CDO.

      I’m totally in favor of what Paulson did. Goldman I’m not so sure.

  8. Point A, the first point of three:

    They might provide a brief advantage to home sellers who are looking to unload an asset they know is about to take another swan dive.
    You’re goddamn right they would. So let’s get going on that, stat! Daddy needs an RV!

    Point IV:
    I don’t understand how anyone can believe prices have “momentum”. As in, these prices are heading up and look like they’ll continue. Until they don’t.

  9. Shiller is some magic combination of genius and clueless.

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