Shiller On Housing: Back? On Track? Or Still Cracked?

Following on from our earlier discussion of the boomerang foreclosure problem, we thought a recent interview between Goldman and Bob Shiller well worth considering – given his relative independence and honesty.

Source: Goldman Sachs

Excerpted from a Goldman Sachs interview with Bob Shiller:

What’s been driving the improvement in the US housing market over the past six to nine months?

Part of the improvement is just the benefit of the summer season. Summer and early fall have traditionally been periods of increasing home prices. Another factor is the ongoing decline in foreclosures. Foreclosed properties tend to sell at low prices and as the foreclosure rate declines, we might expect to see aggregate home prices increase. I also think that price increases that were likely caused by the decline in foreclosures may have been mistakenly taken by the public as a note of optimism, leading them to react to the thought that home prices might be rising again. Inventories of homes for sale are also low, in part because sellers have been holding off on putting their houses on the market in the hopes of further price increases or because millions of mortgages are still under water so many homeowners feel “stuck” in their homes until/unless prices rise more strongly and they can pay off their mortgage with the proceeds of their sale.

Has the US housing market bottomed?

Maybe, but I still worry about further price declines. There’s no really concrete reason for an upturn now; a recent survey of home buyers didn’t find any sudden change in optimism and there seems to be a souring on the idea of home ownership. That might reverse again as the crisis ends. But I suspect that it’s not easily reversed because the whole idea of proudly owning a home has been tarnished. And now Congress is talking about eliminating the whole mortgage deduction or government support for Fannie and Freddie. These are all clouds on the horizon. That’s why I think home prices may still go down.

And on buying a home now?

People think of housing as a form of investment, but really it’s a consumption good. Houses are built to please you and then they wear out, go out of style, and are expensive to maintain. They have a capital value but capital gains on housing adjusted for inflation over the last century, from 1890 to 1990, was about zero. So housing is not really an investment.

Should every American own a home?

Definitely not. There’s something to be said for home ownership; it continues to symbolize our detachment from the old world where landlords lorded over us. That sense of independence is an important part of our culture and I don’t think it is going away anytime soon, although it may be diminishing. But the emphasis on the “American dream” of home ownership was overdone. We were so single-mindedly pursuing home ownership that we allowed our lending practices to deteriorate to a tragic end. And there are many advantages to renting, which oftentimes allows more flexibility and more convenience. Renting also allows people to diversify investments. For many people, buying a home involves tying up all of their cash into one asset – their home.

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