Robert Shiller: A "Deeply Uncertain Situation"

Robert Shiller wonders if a sustained decline in housing prices is in our future:

Things That Go Boom, by Robert Shiller, Commentary, WSJ: It seems that no one in the 1990s forecast the doubling of home prices since 2000 in cities in the U.S. and many other countries. ... Books really predicting the housing boom started to appear only after it was well underway, when their forecasts were simple extrapolations. ...

We shouldn't blame these people for not seeing the boom coming. Nobody did. But those economists who say today that the real estate boom has been justified by "fundamentals" have to explain why they weren't able to forecast the high home prices we have today based on those fundamentals.

With the failure of anyone really to predict today's high home prices, one may well conclude that no one can predict ... the housing market... That may be the right conclusion...

On the other hand, there is another perspective on this colossal failure to predict. Maybe it doesn't mean that no one can forecast, but instead that the high home prices today are just an enormous anomaly that will have to correct downward sometime, if not right away.

This has been the biggest housing boom in world history, and when one looks at a long-term chart of U.S. home prices, this boom stands out among the other price increases like the highest kite in the park. It certainly looks anomalous, and maybe it is. Moreover, home-price booms, and sometimes at least real estate busts, seem awfully persistent lately, so that it looks like we should be able to forecast them. ...

Some short-run indicators have been interpreted as showing that the recent weakness in the housing market may be correcting upward. ... But the increase may be attributable in large part to unseasonably warm weather and sales incentives. ... The futures market still predicts home price declines in all traded cities over the next year, though modestly lower declines than in the recent past. ...

The fact that home prices have risen so high relative to construction costs and other indicators suggests that home prices might fall back substantially in some markets -- and maybe that is what is going on. But one can hardly be sure about whether and when it will happen. ...

We are left with a deeply uncertain situation, but one in which it would seem that a sequence of price declines continuing for many years has some substantial probability of happening. Traditional finance theory has trouble reconciling even a semi-predictable sequence of price declines with basic notions of market efficiency. The situation we are facing is a reminder of the glaring inefficiencies and incompleteness of existing markets for residential real estate, and may be regarded as evidence that institutional changes will be coming in future years to fundamentally change the nature of these markets.

For more, see Jim Hamilton. He sees:

More evidence that the housing market has stabilized, consistent with the recent policy stance of the Federal Reserve. ...

Granted, there's plenty of noise in these monthly data, and mild weather may be helping. So if you firmly expected to see housing continue to deteriorate, you could claim not to be impressed by the last two charts. But if you were expecting to see housing stabilize, as I was, you'd call the series just as they are...

Comments

[ken melvin]

Lots of things, including low interest rates, have contributed; but housing is cutting into living standards. There's more of this increase in wealth's share going on in the form of rents taking a greater cut from labor's return. Is increased productivity but another form of wealth's taking a greater share?

[bullbust]

hehehehe

Shiller's "those economists who say today that the real estate boom has been justified by "fundamentals" have to explain why they weren't " is about right.

Jim Hamilton - who admits he is "expecting to see housing stabilize"- calls the series 'just as they were'. Presumably everyone else 'wants to see housing continue to deteriorate', and are not so objective.

And Hamilton is from ground zero of housing - San Diego.

Economists are not really fudging. But they are also subject to the same human failure like everyone else.
Looking for what they want to see, and going no further when they see that.

Martin Wolf article from April 06
(http://www.libertypost.org/cgi-bin/readart.cgi?ArtNum=137657)

"Where prices have risen far faster than underlying incomes, only two possibilities exist.

Either prices have moved to a higher equilibrium level, in which case future purchasers will have to save more and consume less. That would itself have significant economic implications. Or they have reached an unsustainable level, in which case they will fall in real terms. That would have far more significant economic implications.

The future will tell us which and where - possibly quite soon."

[anne]

[Mark; there is something wrong with the James Galbraith post, for it will not open, at least will not open for me.]

[maria]

I suspect Shiller will have the last laugh, if laugh it is.

[calmo]

2nd anne's comment.

[Mark Thoma]

The Galbraith post was a mistake due to a posting tool I was using to move posts to a backup site. I hit the wrong button and didn't realize it until this morning. It was a duplicate of the original post here.

[save_the_rustbelt]

Some parts of the country never had a boom - we were too busy shipping jobs overseas.

Plenty of cheap real estate in Michigna - if you don't need a job that is.

[bailey]

Ben Bernanke in his 1st speech as chairman of the White House's Council of Economic Advisers (mid 2005 at AEI) remarked on housing:
"While speculative behavior appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom,"
"Those fundamentals include low mortgage rates, rising employment and incomes, a growing population and a limited supply of homes or land in some areas."
"For example, states exhibiting higher rates of job growth also tend to have experienced greater appreciation in house prices,"
On 10/20/05, he stated before the Joint Economic Committee: "at a national level these (housing) price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas."
To my knowledge BB has NEVER publicly altered his rationalization for our housing bubble, nor has he been asked to defend it in any of his appearances before Congress.
Worse than his words, FED actions in the last six months, i.e. open mkt. purchases out the curve and its toothless nontradional mtg. guidance to its banks, indicate it's yet to institute its asymetric policy response to bubbles. Talk is cheap, but credibility is NOT, especially that of the FED Chairman. Thx for the Shiller excerpt, Mark, I missed it.

[anne]

What was the song? "Let me call you Sweetheart?" I take this as the let me call you (to offer my spiffy home price insurance package) Sweetheart, call by Robert Shiller. Possibly home prices will fall, possibly not, but after a decade of investment wrongness by Shiller, there is reason not to be too or unduly frightened. The economy is growing fairly, long term interest rates are relatively low, unemployment is relatively low....

[maria]

Anne:

Are you saying that Shiller was wrong about the dotcom bubble? Or the overvalued market in 2000?

[js paine]

I suspect Shiller will have the last laugh, if laugh it is.

Posted by: maria | Feb 8, 2007 8:15:08 AM

absolutely correct ....imo

[anne]

No; where Robert Shiller tends to be wrong is in the generalizing. There have been important economic-investment excesses through the last decade, as before, but that does not mean the excesses cannot be avoided or generally compensated for when they become apparent. (Which reminds me, think about Japan again.)

[js paine]

anne my dear
are you really this bright eyed
about the prospects ????
its a welcome relief
from what is practically a cult round here....

give a gloomy view from a comfortable chair

but surely you realize normal interest rates on mortgages put up next to household income

means lot values are too high
they may stay put in real terms
as all else exspanse around it in real terms

but such an orderly process
defies my guts sense of providence

[anne]

Another perspective, that satisfies me so far, shows that as in Europe and Australia, slowing of housing is being compensated for by a robust commercial real estate market. I am just not noticing signs of an economy that is threatened. Weaknesses are selective.

[kthomas]

anne, forgive, but it sounds like you might be seriously leveraged yourself.

[calmo]

This B good:But those economists who say today that the real estate boom has been justified by "fundamentals" have to explain why they weren't able to forecast the high home prices we have today based on those fundamentals. Fundamentals being fundamentally elusive.
This B better:On the other hand, there is another perspective on this colossal failure to predict. Maybe it doesn't mean that no one can forecast, but instead that the high home prices today are just an enormous anomaly that will have to correct downward sometime, if not right away. It's not that high house prices aren't noteworthy to economists, just that these are flashes in the pan and we will soon be back to norbal.

[DILBERT DOGBERT]

Calmo, You have found the right word for how I am feeling right now - norbal. Not normal, not real fine, not feeling dandy but norbal.
Thanks for the laugh. If the spring season shows us the way down then we all may look back at feeling norbal and wish things were that good. Time will tell.

[Movie Guy]

You really want to look at Tim Iacono's chart, 'CPI, Home Prices, Owner's Rent Equivalent', from this post at his blog, TheMessThatGreenspanMade.blogspot.com. Barry Ritholtz (The Big Picture) referenced it on 17 October 2005. Hat tip to Tim and Barry. Well done, Tim.

I believe that you may want to check this out as well:

PERCENT CHANGE IN HOUSE PRICES

One Year..Five Year..Since 1980 - By Region and State

New England Region: (CT, MA, ME, NH, RI, VT)

3.57%..57.07%..528.61% - New England Region
4.89%..58.96%..411.37% - Maine (ME)
9.35%..64.89%..358.41% - Vermont (VT)
3.72%..55.90%..405.58% - New Hampshire (NH)
6.34%..60.31%..381.25% - Connecticut (CT)
1.11%..50.89%..626.45% - Massachusetts (MA)
4.55%..86.35%..511.40% - Rhode Island (RI)

Middle Atlantic Region: (PA, NJ, NY)

8.07%.. 67.75%..431.33% - Middle Atlantic Region
6.53%..68.03%..554.68% - New York (NY)
9.19%..81.36%..479.01% - New Jersey (NJ)
8.44%..55.17%..303.87% - Pennsylvania (PA)

South Atlantic Region: (DE, D.C., FL, GA, MD, NC, SC, VA, WV)

9.52%..67.38%..318.34% - South Atlantic Region
6.34%..36.84%..131.09% - West Virginia (WV)
8.92%..71.35%..402.20% - Delaware (DE)
11.30%..113.13%..544.61% - District of Columbia (DC)
13.19%..101.54%..433.27% - Maryland (MD)
9.91%..80.95%..363.42% - Virginia (VA)
8.44%..29.33%..226.43% - North Carolina (NC)
7.79%..32.34%..209.64% - South Carolina (SC)
5.49%..27.90%..234.18% - Georgia (GA)
15.10%..110.62%..387.80% - Florida (FL)

East North Central Region: (IL, IN, OH, MI,WI)

2.80%..25.80%..217.70% - East North Central Region
4.20%..35.24%..228.90% - Wisconsin (WI)
6.95%..41.98%..274.36% - Illinois (IL)
2.33%..17.47%..157.58% - Indiana (IN)
1.02%..17.30%..172.27% - Ohio (OH)
-0.55%..16.64%..220.49% - Michigan (MI)

West North Central Region: (IA, KS, MN, MO, ND, SD, NE)

3.90%..33.39%..202.10% - West North Central Region
8.98%..41.39%..146.93% - North Dakota (ND
5.88%..31.95%..182.92% - South Dakota (SD)
3.38%..42.80%..272.03% - Minnesota (MN)
3.71%..24.15%..149.16% - Iowa (IA)
4.79%..24.73%..143.63% - Kansas (KS)
3.22%..21.71%..156.78% - Nebraska (NE)
5.02%..32.73%..200.65% - Missouri (MO)

East South Central Region: (AL, KY, MS, TN)

7.38%..28.92%..181.90% - East South Central Region
4.14%..24.71%..185.45% - Kentucky (KY)
7.58%..29.48%..196.06% - Tennessee (TN)
8.85%..31.82%..177.37% - Alabama (AL)
10.70%..29.82%..145.38% - Mississippi (MS)

West South Central Region: (AR, LA, OK, TX)

7.73%..28.13%..120.74% - West South Central Region
6.23%..31.74%..154.84% - Arkansas (AR)
4.96%..26.13%..99.30% - Oklahoma (OK)
6.79%..24.02%..115.53% - Texas (TX)
13.14%..39.88%..139.72% - Louisiana (LA)

Mountain Region: (AZ, CO, ID, MT, NM, NV, UT, WY)

11.20%..57.06%..276.37% - Mountain Region
12.91%..59.67%..265.78% - Montana (MT)
14.39%..60.13%..159.52% - Wyoming (WY)
17.52%..59.99%..240.45% - Idaho (ID)
17.41%..40.63%..252.70% - Utah (UT)
8.63%..102.70%..316.13% - Nevada (NV)
3.72%..22.65%..266.80% - Colorado (CO)
14.10%..53.01%..222.89% - New Mexico (NM)
16.37%..95.91%..328.58% - Arizona (AZ)

Pacific Region: (AK, CA, HI, OR, WA)

11.31%..94.42%..497.33% - Pacific Region
10.41%..52.98%..168.27% - Alaska (AK)
16.35%..63.91%..379.22% - Washington (WA)
16.89%..67.61%..348.68% - Oregon (OR)
10.16%..109.60%..551.32% - California (CA)
13.33%..110.11%..438.96% - Hawaii (HI)

United States - All Regions

7.73%..55.53%..303.32% - United States

* Rankings based on annual percentage change.
** U.S. figures based on weighted division average.

------

REGIONAL SUMMARY
PERCENT CHANGE IN HOUSE PRICES

One Year..Five Year..Since 1980 - By Region

3.57%..57.07%..528.61% - New England Region
8.07%.. 67.75%..431.33% - Middle Atlantic Region
9.52%..67.38%..318.34% - South Atlantic Region
2.80%..25.80%..217.70% - East North Central Region
3.90%..33.39%..202.10% - West North Central Region
7.38%..28.92%..181.90% - East South Central Region
7.38%..28.92%..181.90% - East South Central Region
7.73%..28.13%..120.74% - West South Central Region
11.20%..57.06%..276.37% - Mountain Region
11.31%..94.42%..497.33% - Pacific Region
7.73%..55.53%..303.32% - United States

States by Region (or Census Divison):
New England: (CT, MA, ME, NH, RI, VT)
Middle Atlantic: (NJ, NY, PA)
South Atlantic: (WV, D.C., DE, MD, VA, NC, SC, GA, FL)
East North Central: (IL, IN, OH, MI,WI)
West North Central: (IA, KS, MN, MO, ND, SD, NE)
East South Central : (AL, KY, MS, TN)
West South Central: (AR, LA, OK, TX)
Mountain: (AZ, CO, ID, MT, NM, NV, UT, WY)
Pacific: (AK, CA, HI, OR, WA)

Sources:

Regional HPI Summary
Office of Federal Housing Enterprise Oversight
U.S. Department of Housing and Urban Development

State HPI Summary
Office of Federal Housing Enterprise Oversight
U.S. Department of Housing and Urban Development

[Movie Guy]

I hope someone took advantage of my post. That took a long time to format.

[mdr]

Thanks Movie Guy!

[bailey]

MG, I would have preferred 1990 as a starting point, but like it when anyone puts in the effort & shares the results. THANKS.

[Movie Guy]

mdr and bailey,

You're welcome.

If the data had been available in a summary form for 1990, I would have used it. Same for 1995.

I tried to link back to web site this morning and I am not having any luck.

Here's the main page: http://www.ofheo.go

If you can access the web site with the embedded links in my original post or the link above, you can review cost growth data by quarter as far back as the 1970s. Perhaps I should tried harder to find a 1990 rollup.

[anne]

No; leverage is not a problem when interest payments are readily covered by diverse income streams. Berkshire Hathaway is a perfect example of how to manage debt most conservatively, but still to use debt, and this for a company that is a super-catastrophe insurer yet secure enough to invariably gain when insurance claims come while readily meeting the claims. Read the annual reports, they are a revelation.

[anne]

http://www.berkshirehathaway.com/letters/letters.html

BERKSHIRE HATHAWAY INC.
SHAREHOLDER LETTERS 1977 - 2005

[There is an education.]

[Peter Schaeffer]

Ken Melvin,

Of course, housing prices are a serious burden on folks trying enter inflated bicoastal markets. However, don’t think for a moment that housing prices have reduced living standards. Take a look at the MEW (Mortgage Equity Withdrawal) statistics over at Calculated Risk. A fraction of the MEW money has gone into home renovations and the like. The rest has just been spent. Without the housing bubble, we wouldn’t have the trillions of dollars extracted via MEW and living standards would be significantly lower. Of course, this is all incremental consumer debt and using debt to maintain current living standards is absurd.

MG,

Kudos

[Mort]

This boom was predicted in part by Harry Dent using a demograhic view, with the baby boomers buying houses at an increasing pace up until the middle of this decade, after which a longlived decline would set in. See: Any work by Harry Dent. He's always interesting, although in my opinion his equity market comments lose track of his original demographics thesis somewhere along the way - Read with caution, please.