By Mike Whitney
There’s a terrific video at Bloomberg News that will tell you everything you want to know about housing in just under 3 minutes. Unfortunately, the video hasn’t gotten much attention, probably because it veers from the MSMs fairytale about a housing recovery. Even so, I have transcribed the interview below so that readers can judge for themselves whether housing is really bouncing back or it’s just a bunch of baloney.
Keep in mind that Robert Shiller, who predicted both the dot.com and housing bubbles, is widely regarded as the nation’s top housing market expert. Also, the S&P Case-Shiller Home Price Index, which he co-founded, is the benchmark index for home price trends in the country’s 20 largest cities. Here’s the interview (with some commentary):
“According to the latest Case-Shiller Home Price Index, which we got yesterday, home values are up over 4 percent on the year. Can this positive housing news weather the fiscal cliff and all the uncertainty into 2013?
For a closer look at what the housing recovery means for the economy, we turn to Robert Shiller of Yale University, the co-founder of the Case-Shiller Home Price Index.
Good morning Bob. You’ve been very, very hesitant to call a bottom for home prices and an all-out housing recovery, but don’t the data pretty broadly speak to the fact that housing is on the mend?
Robert Shiller: “Well, it all depends on what you mean by “on the mend” and what time horizon you are trying to forecast over. If you’re talking about the real short-run, then it’s on the way down, because the monthly data was down just a smidgen because it’s the Fall season. But, maybe, it IS on the way up in the short run. But I think homeowners care mostly about the longer run. Most people are putting their money in to invest for years, and there, the outlook is very fuzzy. I don’t know why there’s such enthusiasm for that (fuzzy) outlook right now?
(Me: Notice how Shiller dismisses the claim that housing is bouncing back. No, says Shiller, that’s not what the data say. What the data says is that the future is very uncertain.)
Bloomberg Anchor (again): What is making you say that? What is “fuzzy” in your eyes?
Shiller: We’ve seen a decline in general interest in homeownership. We’ve seen rentals rise. Our permit data shows that new construction is tilted towards multi-family. So, if you are sitting in a suburban house,–single family detached–what is your outlook now. I think it is highly uncertain. It’s risky. It could be up? I just don’t see how anybody knows.”
(Me: This is great point, but one that everyone in the media seems to miss, which is, that fewer people actually want to own a home now. That’s why the homeownership rate is actually falling. (See: “Falling homeownership rate and the housing market”, Sober Look) The reason that prices are going up, is because speculators are piling into the market thinking they can make a killing flipping houses or through property management. In other words, investors are driving the market, not organic sales. Just take a look at this at CNBC:
“Up to now the housing recovery had been fuelled by investors buying up thousands of distressed properties, the bulk of them in western states like Arizona, Nevada and California. This helped shrink supplies in those states and boost prices by double digits.” (Mortgage Recovery Still Rocky“, CNBC)
Or this, from Investor Place:
“Housing sales aren’t being fueled by average folks looking to buy a home. Just 61% of buyers are purchasing primary residences, the lowest number since 2005 and down from 70% in 2008. Meanwhile, speculators accounted for 27% of housing sales. They’re buying homes to rehab and subsequently flip or rent.” (“Housing recovery?”, Investor Place)
Keep in mind, that speculation isn’t a sign of market strength. It’s a sign of weakness and instability.
(Back to the interview)
Bloomberg Anchor: When you look at housing in the context of many, many years, then how far are we from a “normal” housing market at this point?
Shiller: Well, in terms of real home values, it looks pretty normal, right now. We’ve come way down from the peak. We’re almost 40 percent down in inflation corrected terms. But that puts us back in the normal range. So, I think that another really plausible forecast for the next 5 years is, Hey, I think it’s going to stay where it is right now. You know, the new Zillow survey of homeprice experts came out with a forecast for the next 5 years that implied a 1.3% real increase per year. So, that’s what those experts are saying. I think they’re a little bit on the optimistic side, but it’s certainly a plausible forecast. Not exciting, but positive.”
Bingo! What Shiller means is that there’s no reason to expect prices to rise any faster. Absent another bubble, prices should continue to plod along at their historic (slow) pace, which means that –for many people–the biggest investment of their lives, is going to be a complete bust. Home equity appreciation is just not going to produce the windfall nestegg that many Boomers are going to need to avoid a life of destitution in their waning years. They’re going to have to look for other ways to increase their savings or keep punching the clock until they keel over.
And, it’s not just prices that are back to normal either. Sales are, too. Just get a load of this from economist Dean Baker at CEPR:
“Both the NYT and USA Today have convinced themselves that house sales are well below their trend level, with the latter telling us that a 5.5 million annual sales rate of existing homes considered healthy. In fact, we are pretty much back to trend levels of sales. In the mid-90s before the bubble began to distort the market, sales averaged about 3.5 million a year. A simple adjustment for the 15 percent population growth over this period would imply an annual sales rate of 4 million existing homes. That is somewhat below the current 4.5 million sales rate.” (“Housing Sales Are Back to Trend”, CEPR)
Since Baker wrote that post in August 2012, existing homes sales have shot up even higher to an annual rate of 5.04 million in November. (According to the National Association of Realtors or NAR) That means that sales are already significantly above trend and well-into bubble territory.
So, here’s the million dollar question: If prices are already at “normal”, and sales are already above trend, and President Obama isn’t going to approve another round of fiscal stimulus, (He won’t) and the Fed’s $85 billion per month QE4 program continues to have no impact on sales (it doesn’t), then what magical force is going to push the market higher?
The only way that prices can continue to rise is if the banks start issuing loans to unqualified mortgage applicants en masse like they did back in 2005-2006. Otherwise, the market’s going to stay right where it is today, in the dumps.