Robert Shiller on the Housing Boom and Bust and where home prices are headed

Robert Shiller

I’m doing this article as I attend a presentation by Robert Shiller, Yale Economics Professor and Co-Founder of the S&P/Case Shiller Home Price Indices at the S&P Housing Summit 2011, as he discussed “Unusual Factors Influencing the Outlook for the U.S. Housing Market. So it may be a little choppy, but here are the highlights of his presentation “live”:

  • A modest increase in new home starts this year – 640,000
  • Projecting some very healthy gains in 2012 and 2013 in construction activity
  • Opportunities exist in “niche” building; Sustainability and Green Building
  • The housing crisis was, in part, a “lack of attention” by many
  • We have a double dip in home prices -there was an enormous increase in home prices from 1997 to 2006, then prices crashed and bottomed out in 2009, followed by a recovery in home prices, however, for the last 7 months home prices have been falling and are now below where they were at the bottom in 2009
  • The boom lasted 9 years, which was incredible….then went down continually from 2006 until 2009 – we are now in a “real and continuing downtrend”
  • The Japanese had a boom like ours in the ’80’s then their home prices declined every year for 15 years until they had decreased to a 1/3 of their value….it seems plausible that US home prices could continue going down
  • The unemployment rate in the US has went up 2/10 of a percent in the last two months and this has created a real negative vibe. The unemployment rate is like home prices and tends to run in trends…it’s not up enough yet to be significant but it could be indicative of a trend…could be suggesting another recession – if it increases again the following month it will be more indicative of another recession
  • We have to keep in mind the current economic cycle is really due to the housing market
  • The US economy has been a very stable economy – they has been a balance of GDP and consumer consumption – however, our latest recession is really different than the prior one in 2001 – as the GDP fell in this recession we did not see consumption fall as much…people kept spending until mid-2009, then finally consumption fell back
  • Personal saving rates of Americans declined until hitting a low of about 1% during the height of the real estate boom in 2006 – probably as a result of feeling confident, ok with debt, etc – after 2006 we saw an increase in personal savings, which is contradictory to what is expected….
  • A lot of this recession was driven by a drop in consumption…why did people stop spending? Largely related to the housing market and falling home prices.
  • Studied from 1978 – 2009 and concluded that a change in “housing wealth” has consistently had more effect on the economy than stock market changes
  • On a chart going back to 1890, Shiller show home prices, building costs, population and interest rates – shows we just went through the biggest housing boom and bust in US history
  • It’s important to realize that this bubble is very unique in US history – therefore forecasting what is going to happen is hard, if not impossible…there is no “history” to base it on.
  • During the boom, Shiller says we confused urban homes with land. According to the National Association of Home Builders, 80 percent of the value of a new home is the structure, 20 percent is the land. This can be seen to be historically true.
  • NAHB surveys it’s builders to track the traffic of prospective home buyers in their new developments – the traffic peaked in 2005 then began to fall dramatically – for some reason, in 2005 people stopped wanting to buy new homes….not sure why.
  • Forecasters are predicting that home prices won’t raise from current levels until around 2014
  • A national market survey of over 100 economists shows that we are “bouncing along the bottom” in terms of home prices with very little expectation of appreciation.
  • Shiller said he would put more weight on the probability of home price declines, although he admits we could see the opposite, it is just too hard to tell with this unique market.
  • Shiller said his home price index could fall another 10 to 25 percent in the five year s would surprise him at all-

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