Economist Robert Shiller: Is a Double Dip in Housing Ahead?By
The Case-Shiller Home Price Index, a respected measure of housing prices across the country, shows a slight improvement for the month of January. However, housing starts are sluggish, delinquencies are up, the foreclosure level remains troubling, and the National Association of Realtors just reported a drop in sales of existing homes. On Mar. 31, the day after the most recent Case-Shiller numbers were released, I talked with Bob Shiller, the Arthur Okun Professor of Economics at Yale and co-creator of the index.
The S&P Case-Shiller Index for January saw upticks in 12 major metropolitan markets. Is that an encouraging sign for the housing market?
The fact that [prices] are up on a seasonally adjusted basis, although the market has been weakening, is definitely encouraging.
You said on Bloomberg Television yesterday that there is a 50-50 chance of a double dip in housing.
I am really going out on a limb to say it's as high as 50-50. Double dips are rare. You know, I have a forecasting model that I used to use years ago when we were doing forecasts for The Wall Street Journal in the late 1990s, and that model emphasized momentum before anything else. When prices go up, they tend to go up for years. That's history. Whereas if they start going down, they'll go down for years. We saw home prices decline between 2006 and 2009—three years of decline. And now that [the market is trending] up, you know, it's perfectly plausible to think we'll have three years or more of increases. But I'm not so sure. We don't know how much of this is transitory because of the government support. We're in such an unusual economy now that [a double dip] has substantial probability.
You've said that 90% of the housing market is supported by the government.
Well, it's 80% or 90%. Really almost the whole market now is government. And we know this can't last.
And that means prices are being artificially inflated?
It seems to. Government support is especially prominent in sales of existing homes, which shot up to over 6 million on an annual rate in November 2009, the month that the home buyer tax credit initially was supposed to expire.
Do we need another stimulus?
I think we may. Our latest GDP growth number was phenomenal. Things seem to be coming back. But I'm worried about a double dip. And I worry that the political support for another stimulus may not be there.
Where do confidence levels fit in?
Confidence has many dimensions. The things measured by the Conference Board and by the Michigan consumer-sentiment people are one aspect of confidence. That has shown improvement since a year ago, but it's still at a low level. I've been trying to develop other confidence indexes in terms of stock market confidence, home buyer confidence. But I don't know that I have the answer. One thing George Akerlof and I talk about in our book, Animal Spirits, is that the economy is driven by stories. And there's a story at any point in time that colors people's thinking. Right now the story is one of anger, frustration, and disillusionment—mistrust. The Tea Party movement is one result of that. And that is potentially holding back the economy.
Do you like the Dodd financial-reform bill?
I think it's the first step. I wish it were stronger. For example, his initial plan to consolidate regulatory authorities would have been important because part of the problem that led to this crisis was that the regulatory authorities were too scattered. But he backed off on that.
He was going to take authority away from the Fed, too, and he got a lot of protests.
Right. I think the Fed should have a lot of regulatory power. The central banking tradition is really one of understanding market psychology. It's part of what central bankers do...so that's the organization that should be in charge of systemic risk management.
How should derivatives be handled?
I think they should be put on exchanges. What I've been writing about in my books is that we need to expand derivatives. I'm giving a talk tomorrow at the SEC and again on Friday at the Federal Reserve about a proposal to create GDP-linked bonds. It would be a new derivative because the government would be issuing bonds linked to the GDP. My argument is that this time of crisis is the time to start doing that. I think it would create a better and more robust market for our debt around the world right when we have to worry about our debt. Derivatives represent an important technology. We have to get it right. Moving them to exchanges is one way of getting it right.
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