Robert Shiller: "There could be another bubble. Absolutely. There could be."

...But the market is predicting flat housing prices over the next five years.

It's a 10 minute interview.

How to hedge the value of your home

Robert Shiller has a new way to bet on housing prices:

On June 30, MacroMarkets launched the first products that let investors make a pure directional bet on home prices. Called MacroShares, they trade on the New York Stock Exchange; their value is derived from changes in the Case-Shiller 10-city home-price index. If you expect home prices to rise, you'd buy the Up Metro Market (UMM); bears can buy the Down Metro Market (DMM). On the first day of trading the bears held sway: Investors bought 14,756 DMM shares, vs. only 6,204 of UMM.

"UMM and DMM will be the indicators that people will turn to when they want a snapshot of home-price sentiment," says Masucci. Shiller thinks they will have real practical value for homeowners. If you buy the DMM and the price goes down, the money you make on the investment will offset your lost home value. If prices go up, you lose money on the DMM, but your house will be worth more.

These are ETPs (exchange traded products). There are fact sheets about them here and here. These seem more friendly to small investors than the housing futures because they require a smaller minimum investment and you can buy them just like stocks.

Robert Shiller on commercial real estate

Meanwhile, Jim Cramer says housing has bottomed:



Cramer's right as long as he ignores the actual data.

Robert Shiller on CNBC now!

Robert Shiller is a guest host on CNBC's Squawk Box from 7:00-9:00 AM today.

Karl Case on the housing market outlook

The co-developer of the S&P/Case-Shiller Home Price Index gives his thoughts on the housing market outlook:

The U.S. housing market slump is nowhere near over and home prices will probably keep falling well into next year, one of the property market's best-known economists said.

Karl Case, the co-developer of a widely watched gauge of the housing industry, told Reuters that the hard-hit U.S. housing market has gone from being the primary source of the U.S. economic recession to one of its biggest casualties.

"Never say never, but it is looking increasingly probable that we will not see a housing market bottom until next year," said Case, an economics professor at Wellesley College in Massachusetts.

"If the housing market was independent of the economy, we would be getting closer to a bottom, but that is not the case and we have a horrible economy," he said in an interview late on Tuesday. ...

Case, whose research has focused on real estate markets and prices for over 20 years, said he did not anticipate the extent of home price depreciation that has transpired since the peak in the second quarter of 2006.

"I did not think it was probable that we would have a home price decline of this magnitude," he said.

For the record, he was a bit over-optimistic a year ago.

How Robert Shiller measured housing prices back to 1890

The S&P/Case-Shiller Home Price Index only tracks housing prices back to 1987, and the OFHEO House Price Index only tracks housing prices back to 1975. This raises an interesting question: How the heck did Robert Shiller manage to measure home prices all the way back to 1890 in his famous graph?

Here's how he did it:

Until recently, the only long time series of house prices for the United States had been compiled by Shiller (2005). Shiller constructs this series by splining together available house price data from 1890–1934 from Grebler, Blank, and Winnick (1956), the home-purchase component of the CPI-U from 1953–1975, the OFHEO from 1975–1987, and the Case-Shiller-Weiss index from 1987–2005. To fill in the gap, Shiller constructs an index of house prices from 1934 to 1953 by compiling data on the sales price of houses from five major cities based on newspaper advertisements. These data, after adjusting for consumer price inflation, show almost no trend increase in house prices until about 1997, leading Shiller and others to conclude that the boom to house prices from 1998–2006 is historically anomalous.

Shiller: Difficult to predict when "biggest bubble in history" will hit bottom

Yale University economist Robert Shiller thinks the outlook for housing is hazy:

It is very difficult to predict when U.S. housing prices will hit bottom because the economy is deteriorating so quickly, economist Robert Shiller, co-creator of the S&P/Case Shiller index, told Reuters on Friday.

The housing market is experiencing its worst downturn in modern history. On a national basis, homes have lost about a quarter of their value, and economists foresee at least an additional 10 percent decline.

What the future holds depends on what sort of traction government programs gain to help stem foreclosures, Shiller said.

"It's hard to predict this market because we've just been through the biggest bubble in history and it's at the time of the worst financial crisis since the Great Depression," he said in an interview with Reuters television.

Shiller noted that prices have been falling quite rapidly every month, adding, "That has a good chance of continuing."

Buffett's and Shiller's stock valuation methods agree

Carol Loomis of Fortune has a new article out saying that Warren Buffett's valuation metric says it's time to buy stocks. I decided to compare Warren Buffett's stock valuation metric with Robert Shiller's. They both compare nicely.

Warren Buffett's stock valuation metric: Total stock market value as a percent of GNP.

Yale economist Robert Shiller's stock valuation metric, based on Benjamin Graham's advice in Security Analysis: S&P 500 10-year price/earnings ratios.

Robert Shiller doesn't compare the S&P 500 only to its current year earnings. Instead, he compares it to the average of the past ten years, adjusted for inflation. This way, he avoids getting fooled when single-year corporate earnings rise and fall with the business cycle.

Although Warren Buffett's and Robert Shiller's valuation methods are entirely different, they both seem to track each other fairly nicely. Knowing what happened in 1929, however, it looks like Robert Shiller's valuation method is slightly better than Warren Buffett's.

House Price Decline Could be Worse than During Great Depression

From an interview with Yale economist Robert Shiller on Yahoo! Finance:

• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.


• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).


• The current hopeful consensus — that house prices will bottom soon and then begin to recover — is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

Robert Shiller Interview: The Subprime Solution

Professor Shiller says the government should bail out homeowners. I generally disagree with him. Instead, I agree with Dean Baker's view that in bubble markets, trying to keep troubled homeowners paying their mortgages is actually harmful for them.

The video is about 20 minutes long. EconLog has a review of Shiller's new book here.

Robert Shiller on Bubble Thinking

Yale economist Robert Shiller, author of Irrational Exuberance, writes about the causes of the housing bubble in The Atlantic:

Many culprits have been fingered for the housing crisis we’re in today: unscrupulous mortgage lenders, dishonest borrowers, underregulated financial institutions. And all of them played a role. But too little attention has been paid to the most fundamental cause, the same one that was at the root of the many booms and busts that Sakolski chronicled years ago: the contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address the psychology that fuels them, they’re going to keep forming. And unless we apply that understanding to the bubble we’re trying to recover from, we risk calamity....

Speculative bubbles are fueled by the social contagion of boom thinking, encouraged by rising prices. Sooner or later, some factor boosts the transmission rate high enough above the removal rate for an optimistic view of the market to become widespread. Arguments that this boom is unlike past bubbles—I call them “new era” stories—become more prominent and seemingly credible. In the recent housing boom, such optimism was much in evidence. A survey that Karl Case and I conducted in 2005, for instance, found that on average, San Francisco home buyers expected housing prices to increase by 14 percent a year over the next 10 years. About a quarter of the respondents reported truly extravagant expectations—occasionally more than 50 percent a year....

Few people seem immune to boom thinking. The recent bubble grew so large partly because the very people responsible for the financial system’s oversight came to share the general public’s rosy expectations. They may not have believed as fervently in the boom, but they still accepted the idea that it would not end badly. Builders kept building, and ratings agencies did not temper their sunny assessments of mortgage securities until after the crisis had begun. In October 2006, Frank Nothaft, the chief economist at Freddie Mac, a major securitizer of home mortgages, told me that Freddie Mac had financially modeled the impact of a price decline of up to 13.4 percent. When I asked him about the possibility of a bigger drop, he replied that such a drop had never happened (at least not since the Great Depression)—and he seemed unable to imagine that it could.

There's a name for this collectivist thinking—Social Proof.

Shiller provides a rational view of the housing bubble:

Since the 2006 peak, housing prices, adjusted for inflation, have fallen nearly 15 percent. Where they’ll go from here is uncertain; we are in uncharted territory. Between 1997 and 2006, real home prices in the United States rose 85 percent; this run-up was historically unprecedented. There was no rational basis for it: fundamental indicators such as the ratio of home prices to building costs, or to rents, or to personal income, also soared, suggesting unsustainable price levels. (The idea that the country is running out of residential space is no more true now than it was during the manias of the 18th and 19th centuries.)

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