Tags: Shiller | home | prices | boom

Shiller: Recent Increases in Home Prices Don’t Guarantee Sustained Rally

By Dan Weil   |   Tuesday, 16 Apr 2013 08:17 AM

The strong price appreciation for homes in recent months says little about their future path, according to Yale economist Robert Shiller.

In January, the S&P/Case-Shiller home price index, which he co-invented, surged 8.1 percent from a year earlier, the biggest increase since June 2006.

“Home prices have risen over the last year, and with those gains there has been a renewed sense of optimism,” Shiller writes in The New York Times. “But do these price increases mean that homes are now good investments for the long haul? Unfortunately, no.”

Editor's Note:
'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

One-year home price increases, after accounting for inflation, have historically meant little for price movement over the next 10 years, Shiller explains.

“Thus, the upturn last year is irrelevant to long-run forecasting,” he states. “Booms are typically followed by busts, usually in far less than 10 years. In a decade, an entire housing boom, if there is one in inflation-corrected terms, is likely to have been reversed and completely washed away.”

In addition, inflation-adjusted home prices generally don’t move much, Shiller writes. In the 100 years through 1990, real home prices on average gained only 0.2 percent a year.

“Most people live in their home for many years,” Shiller notes. “They don’t need to view it as an investment at all, but if they do, they surely need a long forecasting horizon.”

Still, many analysts remain enthusiastic about the short term for the housing market.

“With buying conditions remaining very supportive to demand and overall economic fundamentals continuing to improve, we expect the momentum in housing activity to improve further, providing a supportive backdrop for the recovery more generally," Millan Mulraine, a senior economist at TD Securities, tells Reuters.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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