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Robert Shiller Says The Housing Market Will Crash - No One Else Seems To Think So

by: Tim Worstall

Robert Shiller got the Nobel for explaining how markets work efficiently, invented in part the Case Shiller indices and also predicted the last housing crash.

He's now saying that we're about to be there again - not good news, obviously.

The thing is there's no other, independent, evidence that he's right. So maybe he's not.

We need to listen to Robert Shiller

He's a bright guy, Nobel Laureate and more than that he did call the last housing crash. However, that's not the same as necessarily agreeing with him. Any theory put forward is only as good as the theory itself. The source is important in determining whether to examine an idea but it's the idea itself which stands or falls, not that source.

And there's not all that much evidence of his latest thought. Which is that the housing market in the US is like it was in 2005/6 and is thus on the precipice of a large fall. The problem here being with nominal numbers not real.

Shiller's Claim

He's been saying this for some time now:

The bursting of the US housing bubble in 2006 and 2007 played a major role in the 2008 GFC, with sharp declines in house prices forcing the subprime mortgage crisis and, ultimately, a recession.

And Shiller said we're here again.

Hmm, well, maybe:

'It would suggest declining home prices in the near future,' Shiller, who teaches at Yale University, told Bloomberg Television on Thursday. 'I wouldn't be at all surprised if house prices started falling.'

Sure, it could be true.

Of course it could be true that US house prices are about to start falling. The problem with the claim being that there's not really much evidence of it being about to happen. Not even this:

Case Shiller (Case Shiller Index from FRED)

To claim that house prices are up where they were isn't the same as saying, well, actually, it's just not the same as saying they're up where they were.

First, we've not had the orgy of speculation leading to the rise. We've therefore not got the same number of highly fragile mortgages out there.

Second, and much more importantly, the headline price of real estate isn't all that good a guide. What we want to know rather more is how much does it cost to buy a house? That is, what are real wages doing? And what are financing costs?

We have all noted that cheap money has driven up asset prices in the stock and bond markets. That's rather the point of QE in fact. But if mortgage rates have halved then so has the monthly interest cost of a house purchase. Which means that housing is more affordable even as it's higher in price. Add in rises in real wages and we're just not at the same "real" price of housing that we were.

We've Also Got Other Statistics - NAHB Housing Market Indices

These aren't showing any great bubble that is likely to then crash:

NAHB housing (NAHB housing prices from NAHB)

Sure, as Shiller says, housing prices are up. But we've simply not got the accelerating rise in pricing that indicates an unsustainable boom.

There are other points supporting the current level of prices

Sometimes, after all, prices move not because of speculative bubbles but because of underlying conditions in the marketplace. As Moody's Analytics points out:

Homebuilder sentiment continued its upward climb, hitting a high for the year. It has been hovering in the mid- to upper-60s, indicating wonderful building conditions. Solid household formation and low interest rates are boosting residential construction demand.

True, prices are running a little ahead of affordability for first time buyers but still:

Thankfully, the labor market is tight and incomes are inching upward. It will take time, but affordability is improving. Additionally, the Fed will cut interest rates again this year, also lowering the costs associated with buying a home, which will inch up buyer demand.

My View

Sure, we can worry about the fact that prices are up to where they were before the crash. But then when measured the other way, against actual monthly mortgage costs, they're still not that expensive. Further, we've not seen a wild run up in prices therefore there's not that much reason to suspect a collapse.

Thus I'm much more sanguine about housing prices than Shiller is.

The Investor View

While it's possible that housing prices will fall it seems unlikely. Investment directly into housing itself still looks reasonable. Either as owner occupier or for the rental market. Both, obviously, dependent upon certainty of personal financial issues.

Given the likely stability of the market, homebuilders also aren't fighting some economic headwind. But as ever, even when we've put aside macro issues there's still that little issue of sorting out which builder - or which house - to be aiming at.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.