With the U.S. economy continuing its longest expansion in history, Nobel prize-winning economist Robert Shiller can’t help but notice certain similarities in America’s housing sector to the run-up just before the Great Recession.
As new data from the U.S. Commerce Department released Wednesday showed, the pace of U.S. home construction jumped 12.3% last month to reach its hottest clip since before the current expansion started. That, coupled with a return on the part of Americans to look at housing more speculatively as an investment, has Shiller thinking, “we’re sneaking back into the old 2006 mentality.”
“Housing is driven by narratives. Before 2007, the narrative was flipping houses [and the belief that] home prices have always gone up,” the Yale economist said during an interview with Yahoo Finance’s YFi PM. “Then, after the Great Recession, it was tragic narratives about people who lost their home, or dangers of borrowing too much or lending too much. It’s been 10 years since the crisis. Now, those narratives are starting to be forgotten.”
As Shiller describes in his new behavioral economics-focused novel “Narrative Economics,” the bubble in housing prices witnessed leading up to the Great Recession would be a rather large one to match.
From 1997 to 2005, median home prices in the U.S. rose 75% in real terms as measured by the S&P CoreLogic Case-Shiller index, while the inflation-adjusted consumer price index for rent of primary residence index rose only 8%. That is to say, the rise in home prices was much larger than what could be explained by an unmet demand for housing. As Shiller notes, from 2012 to 2018, U.S. real home prices rose again by 35%, while real rents were only up 13%.
Housing as an investment
While the run up in home prices hasn’t been as astronomical as the lead up to the Great Recession, interestingly Shiller says Americans are slowly returning to looking at housing as a speculative investment just as they were before the crisis. According to the annual survey Shiller has conducted with colleagues that asks buyers’ about the considerations that spark a home purchase, about 49% said “investment” was a major consideration in 2004. That percentage fell to 32% in 2010, but rebounded to 42% in 2016.
This is of course not the first time Shiller has raised a reason to be concerned with the U.S. housing market. In November, when median home prices showed a slowing for the first time in a year, Shiller also made comparisons to 2006 — though he stressed at the time that any eventual bear market in housing likely wouldn’t be as dramatic as the last downturn.
“You have to remember, that the drop in home prices in the financial crisis was the most severe drop in the U.S. market since my data began in 1890,” Shiller said at the time. “I wouldn’t expect anything as severe as the great financial crisis coming on right now.”
The Nobel Laureate mostly stuck to the same wait-and-see thinking and mentioned his latest book was just the beginning of a “call “for more research, but research on people and not just on number crunching.”