Housing Prices Going Sideways?

by Tom on October 1, 2009
in Market Musings, house prices

Robert Shiller did an interview with the Wall Street Journal today. A couple of interesting/disturbing points from his interview:

He believes that house prices will stop going up and will essentially move sideways for 5 years.
The tax credit and the Fed’s purchase of mortgage backed securities will “unwind” and take the “steam” out of the housing market and cause a slump again. He talks about it like it’s a foregone conclusion that the temporary stimulus will be exactly that, temporary and that in many ways it’s accentuating what he feels is a coming slump because we “borrowed 2010 sales” and moved them into 2009.
The inventory problems in the United States are a problem and will continue to be a problem.

I have to say that I’d love to be able to write another 3 paragraphs about why I think that Robert Shiller is full of it and pulled an “anti-Lawrence Yun” on us by being overly negative.

But if I did that, I’d have trouble sleeping…..

Tom Vanderwell

Q&A: Shiller Sees 5 Years of Stagnant Home Prices – Real Time Economics – WSJ

Is the slump in U.S. home prices bottoming out?

Shiller: The situation has definitely changed. With our numbers — the S&P/Case Shiller home price index — going up sharply. It looks like a major turnaround. We’ve been watching that for three months now, and we have some concern that it could be an aberration and temporary. But, at this point, it seems to be evident in just about every city in the U.S. That suggests it’s real. But it probably isn’t the beginning of a major boom, just because the economy is in such bad shape. There’s also a chance that it will reverse. It’s still only three months old, so it’s very hard to be sure at this point. The most likely scenario is that it won’t continue at this high rate of increase, but that it will neither go down a lot, nor up a lot.

So the index will move sideways for a while?

Shiller: Yes, for a while, meaning five years.

What are the main factors driving U.S. house prices? What could push them up, or cause another slump?

Shiller: The main factor is the world economic crisis and the efforts of governments around the world to stimulate the economy. Parts of those efforts have been directed at the housing market. In the U.S., there is an 8,000 dollar first-time home buyer’s tax credit which expires at the end of November. That’s a reason for concern, as it comes to an end. Also, the Federal Reserve has a plan to buy $1.25 trillion worth of mortgage-backed securities to support the housing market. They are most of the way through the program and anticipate phasing it out at some time in 2010 – that’s another thing that will go away. We’ve yet to see how the housing market will continue. Part of the problem is that people are buying now rather than later. When later comes, there could be a downturn in the market.

Is there an oversupply of houses in the U.S.?

Shiller: That’s been a problem. The inventory of unsold houses has been high, but has come down a bit. On top of that, there will be more foreclosures, more homes are going to be dumped on the market as people default. Now, that may show down as home prices will start going up again. But I suspect that this isn’t going to happen. Also, banks have more REO, or real estate owned, that they’re holding on to for the time being. But eventually those REOs are going to be dumped on the market. So that’s why it doesn’t look particularly encouraging from a supply consideration.

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