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Shiller: Housing Rebound Could Be FlakyBy Olly Ludwig | June 12, 2013

The U.S. housing market has definitely found its footing in the past year, but how strong and how solid is the recovery? Its a

fair question, according to Yale Economics Prof. Robert Shiller, who is one of the minds behind the S&P/Case-Shiller

Home Price Index.

Shiller told IndexUniverse.com Managing Editor Olly Ludwig that between the housing markets dependence on the

Federal Reserves ultra-easy monetary policies and signs the publ ics enthusiasm about home ownership may b e waning,

there are clear grounds to wonder if the price gains in the past year may halt or even reverse.

IU.com:Is there anything different this time in the way that the housing market is recovering?

Shiller: Im doing a ques tionnaire survey right now about the publics attitude toward investing, and the public is getting

less and less encouraged about the long term of home investing. In the short term, theyre expecting prices to go up. But

we asked them about expectations going out 10 years, and theyve been increasingly getting pessim istic. So, whos

coming into the market?

Part of the reason home prices are going up is because foreclosure rates are going down. Were

seeing fewer foreclosure sales, and that automatically brings the index up a little bit. The other thing is

that I think professional investors have seen an opportunity in buying underpriced foreclosure sales.

Theyre getting good at capturing the underpriced properties. And that also stands to boost the index.

But its not the same as it was in the early 2000s when what was happening was a widespread public

sense of enthusiasm about home prices.

There are always a mil lion things happening at once, but part of what brought on the las t boom is there had been a

development of investor interest in speculative assets in the 1990s. People who in previous decades would have had

nothing to do with speculative investing learned about it, got interested in i t, started watching CNBC and started reading

business publications.
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After the stock market peaked in 2000 and dropped sharplythe dot-com bubble was burs tI think they rotated into

housing, they thought this mus t be a good investment. And they got enthusiastic about a different market. And it was very

widespreadall over the country. But thats not exactly whats happening now; there might be some of that.

IU.com:Now the larger player coming in in a speculative waythe Blackstones of the worldthey are bigger players,

but have they a more measured presence?

Shiller: Yes. Theyll s top on a dime and get out, compared to ordinary homeowners who in most cases dont have any

plans to sell. So thats why its not as stable a demand. Also, the Federal Reserve is actively supporting the market. So its

not the same kind of market that weve seen in the pas t, so I dont see how anyone could confidently forecast it. We just

dont know what will happen when the Fed pulls out. And, by the way, Blackstone is watching the Fed. Theyre good at that.

IU.com:And what about the subprime component? I presume thats a little different as well?

Shiller: Yes. The lending s tandards have changed. With new quali fied mortgage rules, mortgage lenders are s upposed to

ascertain the ability to repay. So the extreme abuses of the subprime market of the pas t are not as l ikely to happen. Dodd-

Frank says lenders have to verify the ability to pay. The subprime lenders were accused of giving high-interest-rate

mortgages to those that could ill afford them. That has pas sed.

IU.com:So the subprime component is down to a very insignificant proportion of the whole?

Shiller: Yes, I think its low. Subprime means dealing with people who are not fully qualified in terms of their credit history.

And thats not the in thing to do now.

IU.com:Regarding the Federal Reserve, are you confident the Fed can control mortgage rates? Some people doubt it,

especially if theres serious pressure emanating from the Treasurys market, or if serious inflationary pressure shows

up.

Shiller: Well, I dont think the Fed can reliably control interest ratesat least not subject to some constraints on their

purchases. Theyre also a politically constrained organization. There are also a lot of doubts about their policy, so

strenuously keeping rates low by purchases of mortgage securities and long-term bonds might prove to be futile. If the

economy starts s trengthening somewhat and interest rates s eem to be going up at the short end, how much can the Fed

realistically keep rates down? They do have limited power.

IU.com:As you contemplate the inevitable prospect that mortgage rates will go up, at what stage to you see aninflection point where the higher mortgage rate effectively caps out increases in home prices and maybe even creates

a correction in home prices?

Shiller: The thing is that if you look at mortgage rates in a home price forecasting equation, theyre not s ignificant. Its kind

of surprising. The key variables in predicting home prices are home prices themselvestheres momentumand

employment.

We havent seen much of a correction on employment, so the home price market has been kept low, despite the very low

interest rates. It just hasnt solved the problem. So I dont know that I can define what will happen to the housing market in

respons e to interest rate changes.


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The other thing thats happening is that the public is s howing an appetite for rentals. Its not clear if this is just a cris is-

related change or if it represents a taste change. I think it might be a taste change. Its too soon to say. But just like the

younger generation dont buy paper newspapers anymorethey get them online on the Webmaybe they dont buy big

houses out in the suburbs anymore. Theyre mobile; theyre electronic, so they might want to live in an apartment

som ewhere and s it there with their Internet.

IU.com:Are you speculating and musing, or are you looking at data that are telling you this?

Shiller: Well, there are data. I just had breakfast last week with Christopher Leinberger, who is a real estate professor at

George Washington University, and hes been writing recently about what he perceives as a trend toward appreciation

toward a walkable city. Manhattan would be the key example, but there are many examples. I tried to press him on this, and

he thinks that som ehow the Internet is affecting our psychology, that maybe we dont think so much in terms of houses . We

want to be more in the swim of things.

IU.com: If what Leinberger is saying is true, this will put a cap on any long-term increases in home prices?

Shiller: Yes. What it means is that you want to be investing in m ultifamily rather than s ingle family. Multifamily are rental

units, and thats where the price activity is going. CoStar is a company that manages commercial real es tate, and they have

indexes. They have an apartment index, and it has gone up much m ore than our s ingle-family home index.

That might be a clue that there is a demand shift toward rentals. Its not just owner-occupied versus rental; Leinbergers

research claimsits quite clear, he saysthat far-flung suburbs are hurting. And he thinks its because of this new taste

for walkable cities. It doesnt have to be Manhattan. It could be some suburban area thats close to public transit, like

Stamford, Conn., or something like that where there are theaters and restaurants.

As Leinberger says, if youre s itting all day looking at a computer screen on the Internet, you want to be able to get up and

walk outside and see people milling around having fun. Its kind of a new desire we have because of long hours s taring at

computers. We want real people around.

IU.com:Notwithstanding all the caveats weve been discussing, are you still inclined to say that the housing sector is in

some kind of a stabilizing phase? Or could it vaporize quite suddenly when the Fed raises rates?

Shiller: Well I give it a probabil ity of vaporizing. Its going up now, and I think it will likely go up for another year or more, but

beyond that, all bets are off. And yes, the Fed is going to taper its quantitative easing and rates are likely to go up, and we

jus t dont know how secure this boom is.

In some cities, its going up rapid ly now. In San Francisco, its gone up about 20 percent in the last year. It did that in 2009

and 2010, and then faltered. I wouldnt rule out price declines, though I dont have any precise timetable.

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