Tags: Shiller | Housing | Boom | home

Yale’s Shiller: New Housing Boom Could Be a Problem

Monday, 23 Apr 2012 12:48 PM

Yale economist Robert Shiller says another housing boom could spell trouble.

"Thinking that large home price increases would be a good thing seems very widespread," Shiller writes in the Financial Times. "But the effects of any such future price boom would not be so clearly beneficial, and would depend on the causes of the price increase and the financial arrangements that were made for them," he wrote.

"The issues are much more complex than most people seem to imagine."

Editor's Note: Wall Street Insider: The System Is Rigged

Price increases during the last housing boom were related to a loosening of credit standards and weakening of the banking system due to complacency about the possibility of price falls, Shiller notes. "The result has been serious trouble in the banking sector, and the necessity for government bailouts," he says.

High prices were also related to unrestrained and unrealistic public expectations for future price increases, says Shiller. A survey of homebuyers in four U.S. cities that Shiller and Karl Case did in 2004, at the peak of the housing expectations, found that the (trimmed) mean home price increase expected for the succeeding 10 years was 12.6 per cent a year.

"Maybe our respondents didn’t quite understand what they were implying: that would mean more than a tripling of home prices in the succeeding 10 years from an already high level," Shiller says.

"At the least, home buyers must have thought they would make a ton of money: those who borrowed 90 per cent of the money to buy their house in effect saw their investment levered up 10 to one, and so these high expected price increases would be magnified 10-fold for their investment."

"No wonder people felt so pleased with the boom while it lasted."

Business Week reports that Americans bought fewer previously owned homes in March, a reminder that the housing market remains weak.

Sales fell across most of the country. They were unchanged on a seasonal basis in the Midwest but fell by 1.1 percent in the South, 1.7 percent in the Northeast and 7.4 percent in the West.

Editor's Note: Wall Street Insider: The System Is Rigged


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