Sunday, January 21, 2018
Business

Economist who foresaw burst bubbles voices caution

WASHINGTON — He predicted the tech-stock collapse. He foresaw the housing bust.

So naturally, everyone wants to know what Robert Shiller thinks of today's stock prices, now perched at a four-year high. Or about the direction of home prices.

Keep your hopes in check. Shiller is disinclined these days to offer specific predictions about the direction of stocks, home prices or any other asset whose prices can surge or plunge before we can fully grasp what's going on.

In his 2000 book Irrational Exuberance, Shiller warned of a stock-market bubble. Five years later, Shiller detected a bubble in home prices and argued that it posed a grave threat.

Shiller, a Yale economist, is co-creator of the widely followed Standard & Poor's/Case-Shiller home price index. He has been widely ranked among the most influential economists in the world.

In an interview with the Associated Press, Shiller spoke about the housing market, the stock market, the economy and human behavior.

A lot of housing market experts think home prices have bottomed. You've been more bearish.

It's not so much that I'm forecasting falling home prices as that I question whether anyone is able to forecast them right now. They won't fall forever, but they can fall for a long time. I don't know where home prices will be in 10 or 20 years.

If prices do fall further, does it follow that many homeowners will feel less wealthy, and they'll reduce spending and that will slow the economy?

Yes, we find that the "wealth effect" is stronger for housing than it is for the stock market. Many stocks are held in retirement portfolios, so people are not as likely to respond to a decline in value there as they would if it were something more immediate. In recent years, the home-equity loan has become very important as a way of sustaining consumption. Now that home prices have fallen, those loans are not so available. It seems pretty obvious that it's going to affect consumption.

What trends would you need to see for a strengthening of prices and then a sustained rise in home prices?

One thing that has been encouraging: The National Association of Home Builders' housing market index has been shooting up. Builders are seeing signs of increasing demand. But it remains at a low level. So it's ambiguous evidence.

If you were a national housing czar with unilateral authority to do whatever you deemed necessary to help the markets and restore faith, what steps would you take?

This crisis was caused substantially by a failure to manage real estate risk properly. And so we should be thinking like financiers about that risk, and how it should be managed. The mortgage institution we have is traditional. There's no reason why we shouldn't rethink it completely. The Dodd-Frank Act called for a study of shared appreciation mortgages. Those are mortgages where the risk of loss and gain on the house is shared with the lender. So if home prices go down, it's not all on the shoulders of the homeowners.

Do you see more rentals and apartments over the next decade? Do you think single-family home ownership will continue on maybe a slow but steady decline?

After the Great Stock Market Crash of 1929, people soured on stocks as investments. And I could see that happening with housing. The assumptions people have been making that buying a house is the American dream and that that's what you have to do — that kind of assumption is not ringing so true anymore.

Will the foreclosure settlement for about $25 billion between states and the five biggest mortgage lenders strengthen the housing market?

The problem is that the decline in the housing market dwarfs this agreement. The total decline of the housing market has been in the trillions, and negative equity in housing, by one estimate, was about $700 billion. So this is too small to be very effective. It all helps, I suppose, but it's not big.

Do you think there's a bubble forming in the U.S. stock market or in any other asset?

It doesn't seem to me that we're in a bubble situation as we were, say, in the 1990s. In the 1990s, there was just a general mood that we're entering a new millennium, with Internet technology and advanced technology and America soaring. It was a bubble all over the world, really. I don't know that we're in that state of confidence now.

Do you think any asset bubbles are forming in China?

China had what looks like a bubble, but the government has taken steps against it. This is another reason not to expect bubbles so much. The stock market bubble of the 1990s and the housing bubble of the 2000s were still at a time when central bankers and government authorities believed much more in free-market efficiency than they do now. The authorities are now thinking that it's their responsibility to choke off bubbles.

If you had to put all your money for the next decade in either stocks or super-safe, inflation-protected securities from the U.S. Treasury (TIPS), what would you do?

Stocks. They're highly priced, and they're risky, but they've had a good historic record. And last time I looked, inflation index bonds have a negative real yield.

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