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Shiller: "The Real Worry Is That We'll Grow Slowly Until We Run Into The Next Recession."

06 May 2010
Posted by Pete Davis

Yale Professor Robert J. Shiller spoke to the National Economists Club at lunch today in Washington, D.C. He expressed concern of slow growth until the next recession, his definition of a double-dip. His 20-city Case-Shiller real home price index declined 35% from its 2006 peak until early 2009, when Fed mortgage backed securities purchases and the homebuyer tax credit pushed it back up just over half as much, but he expects further housing price declines with the expiration of those government interventions on March 31 and April 30 respectively. 

Shiller spent most of his talk describing how Animal Spirits, the title of his recent book co-authored with Nobel Prize winner George Akerlof, can lead to bubbles, the existence of which are denied by the Efficient Market Theory. "We economists like data sets where n=30 or more, but we have n=2 when it comes to the financial market bubbles of 1929 and 2000. These events were unique." He suggested there is too much short-run market volatility to properly observe long run values. He developed a cyclically adjusted price earnings ration, P/E10, using a 10-year average of corporate earnings to show that we've had only those two market peaks in the past 100 years.
 
Long held beliefs that housing prices would keep going up decade after decade starting in the late 1970s inflation, took a long time to lose their hold on people, but, when they did, the price plunge was steep and unrelated to traditional economic variables. Housing prices are not explained by building costs, population growth, or interest rates as classical economic theory taught. "Some cities are much more bubbly than others." He showed a chart in which Boston and LA exhibited 300% real home price increases from 1980 until 2006, while Milwaukee hardly budged.
 
"Renting is very attractive right now," as he wrote in his New York Times article of March 5, 2010. "A suburban house 30 miles from downtown D.C. may not be a good investment." Americans have believed that property and home ownership were cornerstones of our democracy, but countries like Switzerland, where most households rent, have just as much patriotism and cohesion.
 
Asked if the market had discounted 7 million foreclosures in the pipeline and 5 million more coming as predicted by Laurie Goodman of Amherst Securities, Shiller responded, "That sounds very Efficient Market. Housing is very trendy and very inefficient...I don't think these things are discounted into home prices."

Government and builders need to get back to basics

Government and builders need to create affordable housing to stimulate the market. High prices of homes and exotic financing methods do not address the need for affordable housing.

Build less expensive houses and the demand will be there. Once housing prices are competitive with rents, the housing market will return to normal.

People still want their own place to live, but they do not want the stress and burden of mortgage payments that suck every dollar out of their purse or wallet.

City councils and local planning commissions need to get more efficient in processing building requests to bring developments to fruition quickly. Each city and planning commission needs to establish a cost review group whose function is to reduce costs to the city, builder, and homebuyer.

People want affordable housing and currently it is not happening, with the exception of foreclosed housing which sell and supports the point that lower prices bring in customers.

Establish think tanks or public outreach efforts to get prospective homeowners to provide input. For example, not everyone wants granite or marble if the alternative could be a house they can afford. Basically, people want a roof over their head. Do you need McMansions when a cottage would work?

Lee Ellak
San Jose, CA


I agree on the trendiness of

I agree on the trendiness of housing - it's a key point as the midframe shifts in homeownership. Unless you are fortunate to buy the house of your dreams without financial worry like the wealthy, most upper middle and middle have hung themselves with a weighty long term mortgage, as they bleed their 401k to stay afloat. This is the demographic we need to be most worried about. The inability of most of my upper middle class man tightening the purse strings will eventually leek into other sectors in unseen consequences. If policy continues to make housing unaffordable for sideliners and new enters there will be no choice than to rent. This will be the new trend in metro areas (once again) and bedroom communities alike. Trading up is also fading fast as most I know have resigned to the fact that the house they bought they will have to live in for a long long time. My household lost 50% of its annual income due to a loss of job and no salary offer to match the old. Makes more sense to stay home and raise the kids, live smarter, hike instead of going to brunch, etc. This is the new norm even in my community of upper- wealthy. Renting is now envied a bit, but not as much as honestly being able to afford that house you could not afford in the first place - even in coveted coastal california!


cities may not want affordable housing

There are a couple of reasons why city councils might not want to put real effort into a cost review group as you suggest. First, I don't know about your city council, but mine is just filled with developers. They would prefer building a few high-margin, high-priced homes to building a lot of affordable homes. Not only to they make money on the original sale of the homes, they invest in retail property which will rent for more money if the surrounding community is relatively affluent. Also, the city makes less money on taxes when home prices are low, which is a separate problem. Bottom line: city councils may not have the appropriate incentives to review costs and keep housing affordable.




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