Mortgage, Smart Spending

Is Housing Market Following Stock Market Pattern?

The stock market crashed. Is the housing market next?

That’s not my opinion. And if you asked me, I would say I don’t know if that will happen.

But Robert J. Shiller does think he knows, though he expresses it in a humble way.

You might want to trust him more than me. At least, if you consider his background. Shiller just won the 2013 Nobel Prize in Economics.

Also, he has been right before.

Hardly anyone believed him back in 2007 when the Yale University professor at the time created the famous S&P/Case-Shiller home price index (with Karl Case).

Their index captured US home prices doubling from 2000 to mid-2006 and then plunging 35% amid the worst financial crisis since the Great Depression

If Shiller was more like the far more flamboyant fictional detective Sherlock Holmes, he might say it was “elementary.”

His findings are based on historical research. And they’re not for the faint-hearted.

He predicts (through what he views as historical fact) that housing is like the stock market in that it has cycles of ups and downs. Down is where it is now headed. Up to 40% less in inflation-adjusted terms over the next ten years.

After that, you may not want to hear more but he also sees the current housing craze as a bubble, just like the stock market. The end will be bad, just as it has for every other real-estate boom in history, according to Shiller.

And with housing prices declining, guess what’s next? Another recession…a new one

Interesting enough, from what I read of him, he takes no great pleasure in being right with predictions.

Of course, not everyone agrees with the boyish-looking, 59-year-old professor with an admitted halting speaking manner.

Just as economists disagreed with Shiller in 2007, they often disagree with him now. After all, home prices have continued to rise, with the median price in the US set recently at $208,500  –  which was up 14% from a year earlier.

News stories have pointed out that many individuals recently have prospered with real estate investments. “Today, real estate often seems to be topic A in the national conversation,” writes The New York Times, which adds that many people have made “huge profits’” from selling homes, while others have made large paper profits.

Housing executives of all types disagree with Shiller and cite evidence of a continuing real estate boom, though many say the price escalation in recent times may slow. They cite low interest rates and a growing population as indications that the housing market will remain strong in the future.

The positive side of Shiller’s historical research is that modern day homeowners in recent years have historically been able to devote much less money to having a roof over their heads.

That may be small consolation for investors. But sometimes it’s like landlords collecting rent. You have to take what you can get. ###