Robert Shiller Should Read His Own Tea Leaves
The Yale economics and finance professor who helped create the Case-Shiller index of home prices doesn't believe all the talk about the housing market's big turnaround. "The unfortunate truth," Robert J. Shiller wrote in the Jan. 27 New York Times, "is that the tea leaves don’t clearly suggest any particular path for prices, either up or down."
He wrote that before the latest Case-Shiller numbers arrived today. The figures, for November 2012, show home prices in 20 large cities rising a seasonally adjusted 5.5 percent from a year earlier, the highest gain since August 2006.
When measured year-on-year (a more accurate indicator than month-to-month changes), home prices have improved every month since May 2011. The index is up 9 percent over the six months from March to September alone. Those may not be hair-on-fire numbers (as Bloomberg View columnist Edward Glaeser points out today, no one should want that, anyway) but it certainly qualifies as a great leap forward.
True, the S&P/Case-Shiller index remains 29 percent below its peak in July 2006. It's also true that prices dropped very slightly in October. And, as Shiller argues, some of the most positive changes are seasonal: Home prices tend to rise midyear and fall in the autumn and winter.
Still, the homeownership rate, which has fallen to 65 percent from 69 percent in 2006, seems poised to head back up. My calculus begins with the improving picture on unemployment, which has declined to 7.8 percent from 8.2 percent. More than any other factor, steadily falling joblessness makes consumers more comfortable about parting with their savings for big-ticket purchases.
Some recent housing data also scream "buy now." For example, foreclosures are down, meaning that fire sales on distressed properties are declining. In the same vein, the number of underwater properties, which had been an anchor on prices, is shrinking. About 7 million homes are now worth less than their mortgages, down from 11 million in 2011.
Consumer psychology is also a factor. Nothing spurs consumers on like a price increase. For several years, renting has been more popular than owning. But high demand for rental units and single-family homes has pushed up rents, making the home-purchase decision even more justifiable. And let's not forget that interest rates on mortgages remain at historic lows.
Finally, there is Congress. Underwater homeowners may get a new round of federal assistance for refinancing government-backed loans under a proposal that Democratic Senators Robert Menendez of New Jersey and Barbara Boxer of California plan to offer soon. They would expand the U.S. Treasury's existing Home Affordable Refinancing Program so that lenders are relieved from having to absorb the loss on refinanced loans that default, according to Bloomberg News. The White House plans other steps to speed up the housing-market recovery.
Even if Shiller doesn't believe what his own index seems to be saying, his advice to potential homebuyers is sound: Don’t do anything dramatic or difficult, and don't make any aggressive speculative moves. "If you have personal reasons for getting into or out of the housing market, go ahead," he wrote. "Otherwise, don’t stay up worrying about home prices any more than you do about stock prices."
(Paula Dwyer is a member of the Bloomberg view editorial board. Follow her on Twitter.)