Housing Market Is Heating Up, if Not Yet Bubbling

Housing Market Is Heating Up, if Not Yet Bubbling - ROBERT J. SHILLER - NYTimes.com

Robert Shiller's piece in New York Times 

"We asked the respondents how much they thought home prices would rise both in the next year and in the longer term — each of the next 10 years.

The short-term expectations were somewhat high, with respondents saying they anticipated a 5.7 percent increase, on average, in the next year. (That’s close to the implied home price appreciation of 5.6 percent in the home price futures market at the Chicago Mercantile Exchange.)

These projections were much higher than those in 2011, when respondents anticipated only a 1.6 percent increase, and somewhat above those of 2012, when the expectation was 4.0 percent. Still, in 2004, just before the peak in home prices, short-term expectations were far loftier, at 8.7 percent.

What’s more, long-term expectations in the current survey remained relatively modest, at 4.2 percent a year for the next 10 years. At that rate, if consumer inflation is modest, at, say, 2 percent a year, real prices would rise only about 2.2 percent annually, and we wouldn’t return to the December 2005 peak in real home prices until 2031."

"In reading the most recent answers, I see no signs that home buyers have learned the lesson I tried to convey in the second edition of my book “Irrational Exuberance” in 2005. That message was that existing-home prices have shown virtually no tendency to trend upward in real, inflation-corrected terms over the last century. While land is limited, it’s only a small component of home value in most places. New construction often brings down the value of older homes, which wear out and go out of fashion, dragging down prices.

IT’S as if people are applying to housing an idea described by Frederick Lewis Allen in his 1931 book, “Only Yesterday.” Before the stock market collapsed in 1929, he said, people thought that “every crash of the past few years had been followed by a recovery, and that every recovery had ultimately brought prices to a new high point. Two steps up, one step down, two steps up again — that was how the market went.”

Well, people have certainly been right that there will always be steps up and down. Unfortunately, there is no certainty that the ups will outnumber the downs."