Who is Robert Shiller and why are his recent comments on housing price recovery so important? What does he have to say?

Robert Shiller says that values in the housing market are not poised for an overall recovery, notwithstanding spring-summer 2012 housing price increases in a some cities.  He says that today’s low interest rates alone are not enough to spur a housing price recovery.

Why should we care what Robert Shiller says?

Well, this guy is big – really big.  In fact, he “invented” the perhaps most widely watched economic indicator of housing market price movement in the United States.

He is “Shiller” of the Standard & Poor’s Case-Shiller 20-City Housing Price Index.  So, when Robert Shiller talks about housing price movements, people listen, and listen very closely.

Mr. Shiller notes that there was in fact a 9 percent increase in housing prices over the time period March – September 2012 in his eponymous Case-Shiller housing price index.  Some optimistic pundits have said that this good news shows near certain promise that we are “turning the corner” in the housing price slump.

Strongly disagreeing with these optimists, Mr. Shiller says in so many words that this 2012 Spring-Summer uptick doesn’t mean a thing in terms of predicting a long term positive trend of housing price recovery.

Mr. Shiller is more than pleased to splash the optimists with a few buckets of cold water reality.

Mr. Shiller offers well reasoned responses to the optimism of others.  Mr. Shiller doubts that housing price optimism is well placed.  Let’s examine three expressions of optimism and compare Mr. Shiller’s three down-to-earth responses:

  • 1.  Optimism: Concurrent with the housing price increase nemployment rates dropped from 8.2% to 7.8% March – September 2012

  • Mr. Shiller’s cautious response:  No big deal; unemployment rate declines simply continued a trend inexistence since 2009 and unemployment tends to decline in the summer season anyway.

  • 2.  Optimism: Housing start permit applications have increased and the National Association of Homebuilders/Wells Fargo Index of traffic of prospective home buyers increased over the summer and fall of 2012.

  • Mr. Shiller’s pessimistic response:  No big deal; the more important spring 2012 study/survey by Wellesley College’s Karl Case and McGraw-Hill Contruction’s Anne Thompson contradicts that there was no increased optimism or enthusiasm expressed by prospective homebuyers.

  • 3.  Optimism: Foreclosure activity decreased in 2012, thus presumably making less inventory available on the market.

  • Mr. Shiller’s discounting response:  No big deal; this just continues a longer term trend in existence as reported by Realty Trac and thus should not by itself be seen as the kickoff of any long term trend of housing price increases.

Finally, Mr. Shiller presents five reasoned and discouraging response to optimism concerning housing price recovery:

  • 1. Mr. Shiller says that the 86 percent increase in housing prices 1997 through 2006 was an historical anomaly, unlikely to be repeated by now wary investors.  Such anomalies have eventually reverted to keep the long term growth in housing prices pegged to and indexed to an inflation adjusted consistent value says Mr. Shiller.  The recent “housing price boom” was almost completely reversed by 2012, putting housing prices back on an inflation adjusted consistent value curve at just a point or two above ongoing inflation rates.
  • 2. Mr. Shiller notes that there has only been one other major national housing price boom in the last century – 1942 to 1953 in which housing prices in real terms rose 68% nationally.  It took 44 years (to 1997) for the next “boom” to kick in – and on that metric, the next boom is going to kick in at about the year 2050. Care to wait around for it?  (Note:  I, James MaGee will be 92 years of age when it starts to kick in….)
  • 3.  Mr. Shiller notes that home ownership is actually in decline, at 69% in the third quarter of 2006, down to 65.5% in the third quarter 2012.
  • 4. Mr. Shiller notes that the wild lending that fueled the boom is more reigned in now by (a) new ability-to-pay standards announced by mortgage lenders and (b) the oversight of the new federal Consumer Financial Protection Bureau.
  • 5. Finally, the Zillow-PulsenoicsHome Price Expectation Survey (involving the input of 100 housing price forecasters) was predicting very modest inflation adjusted housing price growth increases of only 1 to 2 percent per year over the next half-decade.

Mr. Shiller’s final word:  Don’t expect an increase in your home price to bail you out of any problematic financial situation, and don’t do anything dramatic or difficult such as over-reaching financially to buy an expensive home or buy a home for short term use if you expect to have to move fairly soon, as there is too much uncertainty to justify any aggressive speculative moves right now.

Much thanks to the New York Times, Sunday, January 27, 2013 edition, page 1, Sunday Business Section: Economic View, by Robert J. Shiller; Titled, “A New Housing Boom?  Don’t Count on It.”

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