Shiller Sees no Housing Bubble, but Perhaps a ‘Bubble Mentality’
Jann Swanson | Mortgage News Daily | Sep 30 2013 | link
While the real estate market has been bubbling, Robert J. Shiller doesn’t think we are in a real estate bubble. At least not yet. Shiller who, along with Karl Case, developed the S&P/Case-Shiller Composite Home Price Index, wrote a column for the this Sunday’s New York Times explaining why 2013 is not 2004.
The Case-Shiller 10-City Composite Index has seen a real, inflation-corrected rise of 18.4 percent in the 16 months ended in July, Shiller said, only about 4 basis points below the largest 16 month increase during the years-long run-up to the 2008 financial crisis. Is it possible, Shiller asks, “that we are lapsing into what I call a bubble mentality – a self-reinforcing cycle of popular belief that prices can only go higher?”
He sees a lot of differences between then – the pre-2008 period – and now and uses the results of this year’s installment of a survey he and Case have conducted since 2003 to illustrate them. The survey involves sending questionnaire to a random sample of recent homebuyers in Boston, Milwaukee, Los Angeles, and San Francisco. The results from the most recent survey conducted in May and June suggest, Shiller said, that we are not in a bubble now but there are troubling signs we may be heading into one.
In response to a question about how much prices would rise in the next year and over the next 10 years respondents had high short term expectations, an average of a 5.7 percent increase over the next year. Respondents to the 2011 survey expected on average an increase of 1.6 percent and those in 2012 projected 4.0 percent. But, Shiller said the 2004 survey pulled in an average response of 8.7 percent. Long-term expectations from the recent survey were also comparatively modest at 4.2 percent per year over 10 years. Assuming inflation at 2 percent this would mean a real rise of 2.2 percent annually “and we wouldn’t return to the December 2005 peak in real home prices until 2031.”
Shiller points to answers gathered through other questions that indicate that we aren’t in bubble territory.” In the 2004 survey nearly 85 percent of respondents agreed that real estate is the best investment for long-term holders. That number bottomed out in 2012 at 66.5 percent and went up a bit, to 70.4 percent, this year. That new number may seem high, he said, but the respondents are people who did just purchase a home.
Some 10.6 percent of respondents indicated their home purchase would be rented out to others, a number that has risen regularly from 2.7 percent in 2004. Shiller said this increase likely reflects the growing demand for rental housing but is not one likely to sustain high prices in scattered suburban housing.