Yale Professor Robert J. Shiller spoke to the National Economists Club at lunch today in Washington, D.C. He expressed concern of slow growth until the next recession, his definition of a double-dip. His 20-city Case-Shiller real home price index declined 35% from its 2006 peak until early 2009, when Fed mortgage backed securities purchases and the homebuyer tax credit pushed it back up just over half as much, but he expects further housing price declines with the expiration of those government interventions on March 31 and April 30 respectively.
Shiller spent most of his talk describing how Animal Spirits, the title of his recent book co-authored with Nobel Prize winner George Akerlof, can lead to bubbles, the existence of which are denied by the Efficient Market Theory. “We economists like data sets where n=30 or more, but we have n=2 when it comes to the financial market bubbles of 1929 and 2000. These events were unique.” He suggested there is too much short-run market volatility to properly observe long run values. He developed a cyclically adjusted price earnings ration, P/E10, using a 10-year average of corporate earnings to show that we’ve had only those two market peaks in the past 100 years.
Long held beliefs that housing prices would keep going up decade after decade starting in the late 1970s inflation, took a long time to lose their hold on people, but, when they did, the price plunge was steep and unrelated to traditional economic variables. Housing prices are not explained by building costs, population growth, or interest rates as classical economic theory taught. “Some cities are much more bubbly than others.” He showed a chart in which Boston and LA exhibited 300% real home price increases from 1980 until 2006, while Milwaukee hardly budged.
“Renting is very attractive right now,” as he wrote in his New York Times article of March 5, 2010. “A suburban house 30 miles from downtown D.C. may not be a good investment.” Americans have believed that property and home ownership were cornerstones of our democracy, but countries like Switzerland, where most households rent, have just as much patriotism and cohesion.
Asked if the market had discounted 7 million foreclosures in the pipeline and 5 million more coming as predicted by Laurie Goodman of Amherst Securities, Shiller responded, “That sounds very Efficient Market. Housing is very trendy and very inefficient…I don’t think these things are discounted into home prices.”