Shiller's Ode To Jacked-Up Prices


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?

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.

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.