Robert Shiller on Home Price Increase
Investors got excited when home prices clocked a 5.1% increase in August, but Robert Shiller is warning against excessive optimism. The sudden jump in home prices was a surprise, and a pleasant one at that. But we should take a closer look before breaking out the champagne. Shiller can help us make sense of the report on home prices.
In case you’ve never heard of him, Robert Shiller is one of the best and most respected economists in the world. He was awarded the Nobel Prize for economic sciences in 2013 for his work on financial economics. Shiller also predicted the 2007-2008 collapse in home prices in his 2005 book, Irrational Exuberance.
More importantly, Robert Shiller helped build the best tool for evaluating home prices. It’s called the S&P/Case-Shiller Home Prices Index. (Source: “Robert Shiller Bio,” Yale University website, last accessed October 27, 2015.)
The Case-Shiller Index combines the work of Karl Case and Robert Shiller to help us understand how and why bubbles emerge in home prices. Shiller is a behavioural economist by profession, meaning he knows investor psychology better than anyone.
And he’s saying not to get overly excited about the 5.1% jump in home prices during August. The numbers look different once you dig beneath the surface.
Home Prices Didn’t Grow, says Robert Shiller
The August numbers continued the positive trend for home prices in 2015, registering a 5.1% gain in the housing market. August was a relatively volatile time for financial markets.
I remember when the Dow Jones Industrial Average fell more than 500 points in a single day. By the end of that week, most analysts were worried about a possible stock market crash. No one would have imagined that among that chaos we would have a substantial gain in home prices.
No one, that is, except famous economists like Robert Shiller.
“Well, I’m not surprised because we’re reporting the August numbers, it’s the end of the summer seasonal,” said Shiller. “If you look at seasonally adjusted [numbers], they’re just about flat, up one tenth of one percent for our 10 and 20 city index.” (Source: “U.S. Home Prices Rise Amid August Market Turmoil,” Bloomberg, October 27, 2015.)
Not only was Shiller unsurprised by the August increase, but he was also unmoved. More people buy homes towards the end of the summer, because they don’t want to move in the winter. That’s Shiller’s argument translated into plain English.
Historically, the cycle of home buying isn’t equally balanced across the year. Different seasons have varying average home prices and adjusting for that cyclicality is important. Shiller is saying the adjustment brings down the August gains to a mere 0.1% gain.
Also, we’re seeing confidence drain out of the housing market. New home sales fell to a 10-month low, indicating that growth in home prices could slow significantly in the near future. In his interview, Robert Shiller hammered home that very same point.
“A year ago our Index was going up at a 10% rate, now it’s a five percent rate,” said Shiller. “This is not the stock market, this is the housing market, and that suggests there might be a lowering, and possibly even declines in home prices in the next year or two.”
Robert Shiller on the Fed and Home Prices
In addition to the cyclically adjusted rate of growth for home prices, Robert Shiller thinks there are other factors distorting our perception of home prices. One key factor is the possibility of an interest rate hike form the Federal Reserve.
Rock bottom interest rates are giving people the chance to buy a long-term asset, like a house, to pacify their immediate concerns. The economy is weak, they’re worried about their job security, and having a home gives a feeling of safety. So they buy housing and home prices get a lift.
But is it sustainable over the long term? With six million people working part time in the United States, and median wages showing no signs of growth, can home prices continue to climb? Where will the demand come from?
On the whole, things don’t look encouraging. “We’re in a puzzling economy,” said Shiller. “This weak economy, it’s worldwide, and it might be a long term malaise.” Considering that level of pessimism from a leading economist, I wouldn’t put too much stock in the August increases in home prices.