09.18.12

Housing Expert Robert Shiller Isn’t Sure Housing Is Back

The Yale economist who called the bubble isn’t hopping on the bandwagon.

When it comes to the housing market, there’s no one more authoritative than Robert Shiller, the Yale economist and co-namesake of the Case-Shiller index of home prices. In a 2005 article for Barron’s, Shiller described the housing market as being in “the throes of a bubble of unprecedented proportions that probably will end ugly.” Now, with many declaring that the housing market is starting to come back, Shiller is more cautious.

First, the case for housing actually coming back: Existing home sales are up over 10 percent for the year and 2.3 percent from June to July, while new home sales are up 3.6 percent from June to July and up more than 25 percent over the year. Prices, which have been dropping in real terms for six years (Shiller called the bubble at around its peak), may have recovered, or at least have stopped falling. July saw a 3.8 percent bump up, and home prices have risen more than 9 percent since February.

But, Shiller says, we shouldn’t draw any hasty conclusions. He points out that this is the fourth apparent bottom the housing market has hit: “We saw it in 2009, we saw it in 2010, and we saw it again in 2011.”

It’s not surprising that we may be hasty to see a bottom—after all, it was the belief that the fundamentals of the U.S. housing market have changed dramatically that led to many cities seeing increases in home prices averaging 10 percent or more every year between 1996 and 2006. We might very well inclined to be optimistic about housing unless the evidence is overwhelming that we should not be.

Shiller noted that people were calling for a return to rising prices after the introduction of the new home buyer’s tax credit, which allowed first-time buyers to claim up to an $8,000 refundable tax credit for purchasing a home. So, in 2009, there was an apparent stabilization of prices. But this turned out to be a false bottom. In San Francisco, there was even a 20 percent jump in prices. Shiller, in a new paper presented last week coauthored with Karl Case and Anne Thompson, describes the tax credit as a “substantial outright gift.” Originally supposed to expire in October 2009, it was extended through April 2010, thus “setting the stage for a decline in home prices in 2011.” And so, every summer since 2009, it has looked like housing had stopped its monumental slide, but “it’s happened four times already,” Shiller said.

What’s happening now, Shiller admits, is a stronger seasonal adjustment than we’ve seen in the past, and there is, he says, a “good chance the housing market is rebounding.” But, he notes, he is “not as ready to jump on as others.” Abstracting away from the month-to-month or even year-over-year data, there is little reason to think that a housing bubble popping can’t lead to falling or stagnant prices for more than the six years since our bubble popped. Shiller reminds us that Japan, which had a dual housing and stock-market bubble, saw two lost decades for housing.

“We saw it in 2009, we saw it in 2010, and we saw it again in 2011.”

So, even if we’ve hit a bottom, we might need to see more evidence to conclude that housing prices will actually turn around substantially. After all, if home prices reverse their nominal slide, they still might only keep up with inflation, meaning that the real value of homes might not go up at all.

Shiller said that the best reason to be optimistic this time was the National Association of Home Builders’ sentiment index, which measures home builders’ expectations of sales for the next six months. The index hit a five-year high in August, following four straight months of increases. Unlike measures of home building or sales, the sentiment index is forward looking, so it can provide evidence that housing might turn around in the future, as opposed to no longer declining right now.

Professor Shiller isn’t willing to jump on the housing-is-back bandwagon. But if everyone else is, that might be all that matters.