Robert Shiller is Asking How Long the 3rd Biggest Housing Boom Can Last
Economic and housing specialist Robert Shiller is worrying rather loudly that the housing market is making the same mistakes.
Famed economist and housing market watcher, Robert Shiller, is once again sounding a loud, clear alarm about the U.S. housing market. In a new article published by the New York Times, Shiller laments that today’s housing market, now the third biggest boom in modern American history, is setting up exactly as past housing bubbles that burst so badly.
Co-creator of the benchmark S&P/CoreLogic/Case-Shiller National Home Price Index, Professor Shiller is looking at the data and, as in the historic housing boom last decade, saying it paints a foreboding image of the end of the cycle.
Ever since February 2012 when the housing price declines from the crash finally ebbed, home prices have risen steadily. As of September 2018, prices for existing homes were 53% higher than they were at the bottom of the market in 2012, according to the S&P/CoreLogic/Case-Shiller National Home Price Index.
“How long this will last and where it is heading next are impossible to know now,” Shiller writes. “But,” he warns, “it is time to take notice” because:
The current boom ran the price of a home costing $200,000 in 2012 to more than $300,000 today. And Shiller notes that even after factoring in inflation (CPI), real existing home prices were still up almost 40%—a substantial increase in less than seven years.
Shiller also points out that building permits and sales of both existing and new homes have all been declining in recent months, which are leading indicators that portend weakness in the housing market. These may signal that “prices of single-family homes may fall soon, as they did sharply after 2006,” Shiller worries. “But with few examples of extreme booms, we cannot be sure what such indicators mean for the current market.”
Contrary to popular belief, the recent housing recovery “is not a return to normal, but a market that appears to be rising to a record.” Shiller is not sure when the boom will end, however, because “the data can’t tell us when prices will level off, or whether they will plunge catastrophically.” All we do know,” he underscores, “is that prices have been roaring higher at a speed rarely seen in American history.”
Walking through historical examples of housing booms and busts, Shiller makes several comparisons and considers what’s different this time. Ultimately, he concludes, nothing is different and that, so called, animals spirits’ keep upward pressure on home prices:
But this is not the same economy as it was in the 1997-2006 boom, the biggest in history, or the post-WWII boom. Urban infill, abundant domestic energy, historic industrial investment and all manner of technological innovation from mobile devices to e-commerce have fundamentally, radically transformed the U.S. economy and way of life (including consumer behavior).
The U.S. housing market may be built in part on the “American dream” because the psychological power of price is real. America is an exceptional place and its people believe it to be so. Thus, “hopium” is a competitive advantage the U.S. enjoys over most other housing markets. And the dream is real enough to attract millions of immigrants to the U.S. every year, another competitive advantage over almost every other nation on Earth and the desperate dream for the many industrialized nations whose populations are shrinking—along with their capacity for future economic growth.
So, the housing boom is different this time. At least in comparison to the last boom, if only because the U.S. is now more than energy independent and even exporting energy once again, the labor market is historically strong and setup for prolonged labor undersupply and the next great phase of the industrial revolution is still in its early stages with U.S. factories posting job openings like never before. The great American re-urbanization has only just begun, and as cities continue to upgrade their built-environment and quality of place to win the lion’s share of investment and job creation, the real estate market will evolve in new ways.
These big macro themes have decades to play out, but this doesn’t mean that the housing market will only move in one direction during that time. Whether the housing market becomes increasingly volatile or builds up steadily again to the point of bust is unclear.
“It can’t go on forever, of course,” Shiller concludes.” “But when it will end isn’t knowable.”