Robert Shiller Questions Whether Housing Has Bottomed, Sees Possible Bubbles

Robert Shiller of the Case Shiller Index, spoke to Fox Business earlier this week (hat tip Ed Harrison). In this short chat, he stresses that the rise in housing prices so far this year look very encouraging, but could prove to be seasonal. He also points out that he is seeing what may be early bubble behavior in San Francisco and Phoenix, and even in Chicago and Atlanta.

If that is indeed happening, it’s not a bug but a feature. As many commentators, including yours truly, have pointed out, Greenspan was concerned about the deflationary impact of the dot com bust (somehow failing to recognize that a speculative bubble that is not fueled by debt is far less destructive than one turbocharged by borrowing, since the second type blows back to the financial system). Remember Ben Bernanke’s famous 2002 “Helicopter Ben” speech? Its title was “Deflation: Making Sure “It” Doesn’t Happen Here.” The Fed cut rates, not in its normal recession pattern of driving them really low for one quarter, at the very most two, but for an unheard of full nine quarters. The Fed was perversely indifferent to the housing bubble that resulted from overly loose money and overly lax regulation. Even in 2006, Bernanke maintained that there was nothing to worry about, that even though consumer debt levels has risen, consumer balance sheets were fine….because he thought the worse that could happen was that housing prices remained flat for a few years. Moreover the Fed is a fervent believer in the wealth effect, and housing has a much stronger wealth effect than stock market holdings. So a replacement housing bubble would be perfect, as far as the Fed is concerned.

The wee problem with this picture is the first time a central bank tried to engineer an asset bubble to stimulate domestic spending was in Japan, post 1985. The Plaza Accord had engineered a huge rise in the yen versus the dollar, and the Bank of Japan was concerned that the damage to the export sector, which was the driver of the economy, would lead to a crushing recession. So it dropped interest rates with the explicit aim of producing asset prices in order to stimulate more consumer spending. We know that movie ended.

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  1. javagold

    its never a good time to buy a house when interest rates are low, its always better to buy when they are high

    its never a good time buy a house when property taxes continue to raise out of control


      1. ambrit

        Dear SH;
        The boom is illusory. The underlying economy upon which this ‘magic moment’ is based is weak at best. Plus, how much of this ‘new’ money is sound, and how much is speculative in origin? Investors can pull the plug in seconds; homeowners are usually in it for the long run. Ask yourself; which class of buyer would you want in your community?

    1. liberal

      its never a good time buy a house when property taxes continue to raise out of control

      If we’d had much higher land value taxes, there’d be no land bubbles in the first place.

  2. Aaron Layman

    I would add Houston Texas to the list. All of this cheap money is simply inflating values in areas which were already doing well.

    The Houston real estate market suffered less than most when the housing crisis hit, and it recovered faster as well. With the recent strength in the oil and gas sector, we were already attracting a lot of new families to the area. The stimulus of cheap money has only served to boost prices of what are in many cases mediocre homes. When you compound that with the fact that banks have also held a lot of their REO properties off the market, you’ve got the recipe for inflated asset prices.

    The real estate market in my hometown of Odessa Texas has been absolutely crazy during the past two years. Odessa/Midland has been one of the best performing markets in the state. It’s like the 80’s all over again. We should remember how that worked out. Home prices have gotten way ahead of fundamentals, particularly when you consider that this flat, desert landscape is about as attractive as your garden variety lunar meteor crater.

    1. ignim Brites

      This illustrates why the US is not an OCA. We should take a lesson from euroland and breakup the dollar zone while we have the chance.

  3. Good to Great

    Painful bubble is blowing in northern Virginia and DC…..with interest rates this low, a buyer can spend $500-600k yet keep a monthly piti around $3,000. This is fairly affordable for a two-income professional couple in this area. The result is that if you’re a two-income professional couple, you *have* to spend this kind of money in order to live in a reasonably decent neighborhood – and that’s for a crappy house. Inventory below $500k has been so tight for the past four months that anything well priced and in even marginal shape is going under contract in a matter of days.

    As buyers in this market we are completely frustrated. If we do pull the trigger we’ll likely be stuck for the long haul — as soon as interest rates rise prices will drop.. It’s all about the monthly payment.

    If we don’t buy, obviously we’ll continue to be at the mercy of a landlord. Rents are comparable (it’s all about the monthly payment).

    1. liberal

      Heh. We’re on the opposite end of the stick—thinking of moving away from our DC suburb in MD. Though if we move to a place like Boston…

  4. price manipulation

    In the San Francisco bay area I believe the banks (or fannie and freddie) are gaming the system by holding the low end houses off the market and dumping higher priced homes at a lower price.

    This achieves two things: First it raises the sales volume. Second it raises the median price.

  5. S Brennan

    And where are the banks getting the “capitol” to hold houses off the market?

    Hint: Turbo Timmy can handle that question…maybe with the help of Eric [I created MERS] back in ’96] Holder.

    1. Yves Smith Post author

      Where have you been? The overwhelming majority of mortgages are sold to investors. So banks aren’t holding inventories. It’s a mortgage securitization trust that does.

    1. Jus7tme

      Given that facebook (fb) has dropped by over 50% since the IPO, the SF office bubble ought to pop any day now.

      Basically, the bubble is caused by ill-conceived social media companies that are gambling that having an office next door to Zynga will cause the valuation of Zynga to rub off on them.
      The only problem is that ZNGA also dropped >50% since the IPO.

  6. Trader

    The housing bubble never popped in Honolulu, Hawaii. House prices only dropped about 15% and have been rising for quite a while. Currently the average house is about 8x median household income, making it the most expensive market in the U.S.

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