Shiller Sees no Housing Bubble, but Perhaps a 'Bubble Mentality'

While the real estate market hasrnbeen bubbling, Robert J. Shiller doesn’t think we are in a real estate bubble.  At least not yet.  Shiller who, along with Karl Case, developedrnthe S&P/Case-Shiller Composite Home Price Index, wrote a column for the thisrnSunday’s New York Times explainingrnwhy 2013 is not 2004.</p

The Case-Shiller 10-City CompositernIndex has seen a real, inflation-corrected rise of 18.4 percent in the 16rnmonths ended in July, Shiller said, only about 4 basis points below the largestrn16 month increase during the years-long run-up to the 2008 financialrncrisis.  Is it possible, Shiller asks, “thatrnwe are lapsing into what I call a bubble mentality – a self-reinforcing cyclernof popular belief that prices can only go higher?”</p

He sees a lot of differences betweenrnthen – the pre-2008 period – and now and uses the results of this year’srninstallment of a survey he and Case have conducted since 2003 to illustraternthem.  The survey involves sendingrnquestionnaire to a random sample of recent homebuyers in Boston, Milwaukee, LosrnAngeles, and San Francisco.  The resultsrnfrom the most recent survey conducted in May and June suggest, Shiller said,rnthat we are not in a bubble now but there are troubling signs we may be headingrninto one. </p

In response to a question about howrnmuch prices would rise in the next year and over the next 10 years respondentsrnhad high short term expectations, an average of a 5.7 percent increase over thernnext year.  Respondents to the 2011rnsurvey expected on average an increase of 1.6 percent and those in 2012rnprojected 4.0 percent.  But, Shiller saidrnthe 2004 survey pulled in an average response of 8.7 percent.  Long-term expectations from the recent surveyrnwere also comparatively modest at 4.2 percent per year over 10 years.  Assuming inflation at 2 percent this wouldrnmean a real rise of 2.2 percent annually “and we wouldn’t return to thernDecember 2005 peak in real home prices until 2031.” </p

Shiller points to answers gatheredrnthrough other questions that indicate that we aren’t in bubble territory.”  In the 2004 survey nearly 85 percent ofrnrespondents agreed that real estate is the best investment for long-termrnholders.  That number bottomed out inrn2012 at 66.5 percent and went up a bit, to 70.4 percent, this year. That newrnnumber may seem high, he said, but the respondents are people who did justrnpurchase a home.  </p

Some 10.6 percent of respondentsrnindicated their home purchase would be rented out to others, a number that hasrnrisen regularly from 2.7 percent in 2004. rnShiller said this increase likely reflects the growing demand for rentalrnhousing but is not one likely to sustain high prices in scattered suburbanrnhousing.</p

A series of open-ended questionsrnregarding factors that had or might influence home price changes elicitedrnresponses in 2004 that Shiller said suggested bubble thinking, answers like “limitedrnland,” “high demand for housing,” “population growth,” “everyone wants to bernhere” and “buyers willing to pay any asking price,” as well as responsesrnspeculating about interest rates, then at around 6 percent</p

Answers this year did not, he said,rnsuggest a bubble mentality beyond the interest rate theme.   “Americansrnare still relatively sober about housing. They aren’t showing ‘irrationalrnexuberance‘ about home investing to the degree they did in the past, at leastrnnot yet.”</p

However, borrowers are also notrnbeing completely realistic.  Shiller saidrnhis message has long been that existing home prices “have shown virtually norntendency to trend upward in real, inflation-corrected terms over the lastrncentury.”  Land is limited but isn’t arnmajor component of prices in most places. rnNew construction often brings down the value of older homes, which wearrnout and go out of fashion, dragging down prices.  While prices go up and down, there is nornguarantee that the ups will outpace the downs.</p

People who are now inclined to buy arnhome. Shiller are now buying on the theory that we are in an economic recoveryrnand interest rates are likely to rise and for those reasons it is a good timernto buy. People mostly don’t seem to be prompted by the anticipation of anotherrnhousing boom at least not at the moment.  “But whether these attitudes mutate into arnnational epidemic of bubble thinking – one big enough to outweigh higherrnmortgage rates, fiscal austerity in Congress and other factors – remains to bernseen.”

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