Shiller Warns on Housing

Yesterday seemed to be all about Real Estate. For those of you that follow this space, you definitely want to go read the latest work via Yale professor Robert J. Shiller on "Long-Term Perspectives on the Current Boom in Home Prices" in The Economists' Voice.

When Shiller wrote Irrational Exuberance - warning of a peak in equity prices - it was published coincidentally with the peak in the market in 2000.

Shiller admonishes:

The news is not good for homeowners. According to our data, homeowners face substantial risk of much lower prices that could stay low for a long time after. Luckily, though, derivatives products, notably a futures market, are being developed that they will soon be able to use to insure against this risk.

The good doctor doesn't mince many words in the following pages. His warnings are stark:

• The data show no long-term uptrend in Real Home prices

• The only other time the United States has experienced a large home price boom was around the end of World War II

• Hedging instruments are soon to be available to Home owners to protect against severe downturns in Housing values (minor sales pitch)

Some of Shiller's charts:

Real Home Prices versus Rent

It is striking that, while there does not seem to be a genuine long-term uptrend in real house prices, there does seem to be a genuine long-term downtrend in real rents. And yet, Shiller notes, in practice, the situation is very different: Not only do real home and rent prices fail to track each other, but the rent-price ratio has shown a remarkable downtrend since 1913.

Residential Investment as a Share of GDP

U.S. versus Norway versus Amsterdam prices

Very thought provoking stuff. The entire piece (don't worry, it's short) is worth a read.

Source:
Long-Term Perspectives on the Current Boom in Home Prices
Robert J. Shiller
The Economists' Voice, Vol. 3 (April 2006)
http://www.bepress.com/ev/vol3/iss4/art4/

Comments

[Arnold Layne:]

Barry, thanks, that was very interesting. I didn't realize until the end that it was a year old. Still relevant, but too bad that's his 'latest' work.
Trying to interpret the US housing price graph,
1. Since we don't have data pre-ca. 1897, choosing that as a starting point is a bit serendipitous
2. It appears housing prices could make major changes as a step function, and that overall, going forward, the latest step remains intact
3. I suppose it's also possible that prices completely revert, as in the 'bumps' occurring in the70s and 80s
Money management discipline caused me to sell a home purchased in 1998, last Fall. I actually feel a bit liberated, being a carefree renter at this point!

2007 Apr 06 01:18 PM