The S&P/Case-Shiller Index released on Tuesday disclosed that December home prices in 20 U.S. cities jumped by the highest level in more than six years. January new home sales also produced encouraging numbers, a 15.6 percent jump on a month-over-month basis to the annual rate of 437, 000. This exceeded the 3 percent rise, 380,000 annual rate expectation. Some would say these are good signs, that the housing-market recovery is getting stronger. But the co-creator of the S&P/Case-Shiller Index, Robert Shiller, is saying not so fast. In a recent Wall Street Journal interview, Robert Shiller expressed little optimism about the housing market. Instead he is “worried” about increasing home prices as he’s uncertain this can be sustained.
Here’s some highlights.
WSJ: Did we finally hit a floor in home prices last year?
Shiller: The trend in home prices seems to be up now. It has been going up. That’s upward momentum, which by my general rule of forecasting has been good for the future. I’ve been tentative about that. It may well be the turning point.
But I’m not sure about that. I’m more worried than most people that it could be a short-lived turnaround. It could be like the 2009-10 upturn where we saw home prices rising right after President Obama took office and right after the home-buyer tax credit was instituted. In that upturn there were some cities that did quite spectacularly. And then that fizzled. I’m not too sure that this one will extrapolate either.
WSJ: Why are you more worried than most people?
Shiller: Part of the reason the indexes have gone up is because the foreclosure boom has receded. Foreclosed homes sell at a lower price, and the share of those sales has been falling. People might be deceived by this by looking at the indexes. The question is whether the gains will be sustained.
There isn’t any sign of the real enthusiasm we saw during the last bubble. The question is whether this could be the very vague beginning of a new boom? I guess it could. I just don’t know. Then there are issues with what the government does to support housing. They’re doing everything they can. They say they’re going to stop some day. When will people start worrying about that?
WSJ: Could it be possible that prices are rising by double digits in these places simply because they fell below their long-term relationship with incomes and rents, and are now bouncing back off of that?
Shiller: Phoenix overshot. Prices got too low. In real terms it was down well over 50%, maybe close to 60%. Now it’s bumped up. It doesn’t look out of line either way now.
WSJ: What do you make of the investor activity in the market right now? A lot of these buyers are all cash buyers—no leverage—buying on rental return. Are you worried about any return of speculative purchases?
Shiller: In a housing debacle, I’m sure some houses are underpriced, and there is probably a profit opportunity for some people who are going to choose carefully. I’m not surprised that this is going on. There seems to be a shift in public tastes for the time being at least for rental. So this business doesn’t surprise me. It seems to be an appropriate response.
This isn’t the first time Shiller has expressed doubts about the rising housing market; he’s been concerned for awhile. Back in January he also expressed concern in a New York Times piece and here.
