Robert Shiller, the Nobel Prize winning economist, has predicted that despite the current buoyancy of the housing market, prices will eventually drop. Speaking to Yahoo Finance Live, he said that – “They’ll come back down, not overnight, but enough to cause some pain.”
House prices have recently seen their sharpest rise in 15 years. The most recent S&P national home price index saw a 13.2% annual gain in March of this year. Last week the National Association of Realtors said that the average existing home price in the U.S. was $341,600, a rise of 19.1% over April 2020.
Shiller admits that there is no clear explanation as to why the housing market is booming. But he did add that he expects the market conditions to remain buoyant for the next year, or perhaps two. He said that the work from home revolution and low-interest rates would sustain the market in the short term.
Shiller said that – “This is not a market that collapses overnight. It’s less short-run volatile than the stock market. But you can see that we’re seeing price increases now that haven’t quite been realized since those years just before the financial crisis. I think it is some kind of irrational exuberance, people are having fun, and they will as long as prices keep going up.”
A market with “aspects of a bubble.”
In the interview, Shiller described the current housing market as having “aspects of a bubble to it.” He said that the rapid home price increases seen over the past year are reminiscent of those seen in the years leading up to the recession of 2008, which wiped out trillions of dollars from ordinary American family wealth.
He compared the current market to that of 2003 – “There is excitement and people are talking and some people are bidding way more than the asking price and that becomes a narrative or a story.”
He added that although there were similarities to 2003/2008, the current market differs from the mortgage crisis that caused the last crisis.
“It’s not the same as 2003, it could be stronger. I think we have better protections, we have better supervision of lenders. So I don’t know if we should be worried about 2007, 2008, 2009 happening again.”
He does find the current market conditions as “disquieting” though. He singled out Phoenix (Arizona) as an example. The Phoenix housing market has had the biggest increase over the past year with home prices rising by 20%.
Shiller is the co-founder of the CME Case Shiller home price index futures. This was established 15 years ago to allow people to hedge their risk during housing markets like the current one.
Speaking about the futures market, he compared the current mood of the nation as it recovers from the coronavirus epidemic as similar to that at the end of WW2 – “So our futures market is now predicting big increases over the next year or more but it’s not certain. It kind of reminds me of the spirit after World War 2 ended. There was a spending spree by people. They were jubilant the war was over.”