Where To for Home Prices? Robert Shiller Weighs In

Recent Case-Shiller index numbers showed another decline in house prices -- prices are now at 2003 levels. At the same time, homebuilder stocks such as Lennar (NYSE: LEN  ) , Pulte (NYSE: PHM  ) , and DR Horton (NYSE: DHI  ) are near 52-week highs. Lennar's CEO told analysts last week: "Our first-quarter results reflect another quarter of confirmation that both the housing market and the overall economy are stabilizing and that a very real trend is beginning to take shape."

Last week, Yale professor Robert Shiller -- author of the new Finance and the Good Society and co-creator of the S&P/Case-Shiller Home Price Indices, stopped by Motley Fool headquarters in Alexandria, Va. I interviewed Shiller to get his thoughts on the housing market, which you can watch in the video clip below. (You can find a transcript beneath the video clip.)

Brian Richards: Let's turn to housing for a second. So, the Case-Shiller Index numbers came out recently, and in January the numbers dipped a little bit more, and the prices are now at 2003 levels. Now at the same time, homebuilder stocks have, a slew of homebuilder stocks are at 52-week highs, and this week Lennar's CEO said that their first-quarter results -- let me read the actual quote -- "reflect another quarter of confirmation that both the housing market and the overall economy are stabilizing and that a very real trend is beginning to take shape." What are the data telling you about the housing market?

Dr. Shiller: Well, our numbers are still going down, but our numbers we just released January, in the first few months of this year, there are positive signs, notably the National Association of Homebuilders Housing Market Index -- which is based on a survey of builders -- shows that builders are seeing signs of optimism. Although, the very latest number in February was just flat, so it's not uniformally good. Things seem to be weakening a little bit in the latest month or so. But I find it very difficult to predict home prices right now.

Home building is rather different, by the way. Homebuilders are not bothered by the fact that in certain regions, homes are below construction costs. They just don't build there. All they need are some places where homes are selling for above construction costs. That's really not the same market.

Will this market pick up? I tend to take a different perspective. I keep getting asked by reporters, "Is this the bottom? Is this the turning point?" And I'm wondering what they're asking about. It sounds implicit in their question that they think that there's going to be a day soon and then it's going to zoom up again.

Richards: You're telling us it's not like that.

Shiller: On my website, you can find I have my index of home prices back to 1890, and it looks like this recent boom and bust is unique. It hasn't happened at such magnitude on a national scale before. We've had other examples of famous booms, but they're regional, not national. The question is: What happened after those? The most famous boom before this one is the Florida land boom that peaked in 1926. That was three years before 1929, and think of it as part of the same Depression phenomenon that followed, but we can't prove that.

So, Florida, the strangest thing happened. People started to think, the story was: Well, the automobile has come in, and now everybody can drive down to Florida and spend the winter down there and then drive back home. So everybody wants to go to Florida, and they're running out of land. You're not going to be able to buy there before long. And prices got really high, and then they crashed. And then, do you know how long it took for Florida to have another boom? They had some little booms in the '70s, but the really big Florida boom came after 2000, so it was like 80 years later, OK?

Los Angeles had a great boom in the 1880s. Do you know how long it took for them to have another one after theirs crashed? It wasn't until the 1970s, so these things don't necessarily repeat, and so I don't see any reason to think that we're about to take; we might, I don't know. Bubbles are social epidemics, and are we primed for another one now? I don't see it, but it could happen, but I don't see it.

Brian Richards is managing editor of Brian holds no position in any company mentioned. The Motley Fool has a disclosure policy.

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  • Report this Comment On April 06, 2012, at 8:05 PM, duuude1 wrote:

    Thank you so much for highlighting such amazing people like Shiller.

    All I can say is that I am most thankful for having found a couple of contrarians like Robert Shiller and Dean Baker over a decade ago. All I know is that these two were the only clear voices warning against the housing situation long before it imploded around 2007. I value the contrarian voices, the rare voice that, as Shiller mentioned in his interview, speaks the truth like the Motley Fool in Shakespear's play - and contradicts conventional thinking and does so from a foundation of good data so we can confidently move against the crowd. Every single person I knew, friends, family, co-workers, strangers and not-so-strangers, berated me for well over a decade for not buying a house - scoffed at me for "throwing away my rent payments". Shiller is the only one I know of who spoke from the data - and warned against buying into the home hype. I listened to him, not the crowd. I've never owned a home.

    The Motley Fool urged us to continue buying stocks throughout the massive downturn we just recently experienced (and are still struggling through). I listened to the MF - and not to the vast majority of people who clearly sold or didn't buy during this downturn. I'm fully loaded with US equities. No bonds. No treasuries. No gold or silver or pork bellies or soybeans. Just US equities thank you.

    And thanks to having a couple of valued contrarians as unofficial advisors, I've been able to more than triple my total net worth compared to early 2009 and have effectively retired in my early 40's.

    None of the people who have berated me for "throwing my rent away" are retired.

    Find a couple of valued contrarians who provide clear guidance from a foundation of data - and not someone who spouts what everyone else does and especially because their dad or their uncle or grandmother said so. You can pretty much be guaranteed that what most people say, especially the highly impassioned folks, are... wrong. Very wrong.

    If you invest in gold because your uncle pounds the table at Thanksgiving saying the country is going to hell and gold is the only safe investment - don't be surprised if you are working well into your 80's. Your future is much too important to listen to an angry uncle!

    Foolishly thankful,


  • Report this Comment On April 06, 2012, at 10:08 PM, jrj90620 wrote:

    If housing hasn't bottomed,this country is in a real mess.With the Fed keeping interest rates well below actual inflation,near zero,I don't know what they could do to bail out housing.I believe that housing has bottomed and will continue rebounding,unless the public and investors figure out how high inflation is,stop buying govt debt/dump bonds and/or the Dollar crashes,causing interest rates to soar.

  • Report this Comment On April 07, 2012, at 5:03 AM, duuude1 wrote:

    Hey jrj, duuude! That's what I'm talking about. So you're the angry uncle pounding the table at Thanksgiving, ain't ya?

    So uncle jr, first of all your comment: "If housing hasn't bottomed, this country is in a real mess."... There has never ever been a point in time when this country was NOT is some kind of a mess. There has always been a war, a drought, a depression/recession/deflation/inflation, riots, lynchings, and just all around crap from the very beginning of our history - and guess what duuude - there always will be. And guess what - we are somewhere around 3-10 years away from the next recession (look at a timeline showing the occurences of past recessions - it's like clockwork). But guess what - this country is also the best place to be in the world and the best place to invest. Just one look at the historical stock returns despite the world wars and great depressions and the clockwork recessions, all of which were much much worse events than anything we've experienced - and that's the data you need to look at. Not this subjective feeling that "this country is in a real mess." Many years ago I read Jeremy Siegel's early book, Stocks for the Long Run, and that was my first eye-opener to what the DATA says about what investment has consistently done by far the best over the long haul despite all the crap going on in the world and here at home. Don't fret the "little" details and stick with confidence to what the data says.

    Second your comment "I don't know what they could do to bail out housing" implies that housing should be bailed out. Based on data on median home prices and median incomes, homes are still over valued in many places. Should our government support an artificially high home price? Do you want a first-time home-buyer or any home buyer to pay more than they should - for what? To support the values of homes that someone else foolishly paid too much for? Just like many people in the country said that the banks and auto companies should go bankrupt for making poor financial decisions - shouldn't people also deal on their own for their own financial decisions?

    And finally you said "I believe that housing has bottomed and will continue rebounding, unless... "

    There are a lot of "unless"'s. And some of those unless's are pretty big ones, many you have not mentioned. Unemployment, median incomes of the newly employed, bank reluctance to lend, shadow inventory and still massive foreclosures yet to come...

    I don't know you jrj, so forgive me. But I believe Shiller and his data and his track record long before I can give your belief of a housing bottom and imminent rebound any shred of consideration. You are not alone - the majority of people judging from the media - also believe housing has bottomed. But I will side with the proven contrarian, Shiller, before siding with most of the people - the many many good hard-working honest people - who unfortunately have been consistently shown to be mostly wrong.

    That's why I say you gotta listen to the data, and listen to the few few few people know the data and who get it right. Listen to the few - rather than the many.

    Oh and one more thing duuude - Shiller's an optimist. Listen to his interview. He's a contrarian and an optimist. If you go around saying "this country's going to hell" and invest accordingly, well your finances will go to hell as well.

    Good luck!


  • Report this Comment On April 09, 2012, at 1:07 PM, Manlobbi wrote:

    I can't believe you got hold of Robert Shiller.. well done!

  • Report this Comment On April 09, 2012, at 4:20 PM, CaptainWidget wrote:

    <<All I know is that these two were the only clear voices warning against the housing situation long before it imploded around 2007>> they weren' could find you voices from all over the socio/political/economic spectrum who were predicting housing price adjustment. Hell, I was predicting a housing price drop in 2006 based on 0 knowledge of markets and plain old common sense (when everyone you know thinks that buying a house is an unbeatable investment, it probably isn't)

    This was probably the most obvious disaster in the history of mankind. Let's not give too much credit where credit isn't due.

  • Report this Comment On April 09, 2012, at 6:24 PM, duuude1 wrote:

    Hey Kahuna,

    I'm 100% in agreement with you - I actually told my wife back in 2007 that this housing crisis is a decade-long type of problem - not something that will be resolved in a year or two. But since no one (homeowners, bankers, politicians, etc) wants the housing market to really crash down to its real and proper value (ripping the band-aid off quickly) that means that this mess will last that much longer. Someone on this MF site mentioned something that I also agree with - anyone who bought within several years of the peak will never recoup their losses. Eventually these people who are underwater will come to recognize this truth - and they WILL walk away from their albatross. What was the last figure on the percentage of homeowners underwater - 20% or so? More? Those homes will go into foreclosure as well. So I agree with you that this will go into 2020 or perhaps even longer.

    Fools - don't buy a house! Rent!

    When you finally hear everyone say "don't buy a house" then it will be time to buy :)

    Hey Captain,

    You are probably right that there were others besides Shiller who were calling for a housing collapse. The reality of making these calls is like heads or tails - right? Only two directions to pick from: up or down. The question is - which quacks and nutjobs and wingnuts and extremist blowhards do you listen to? I'll tell you: the one who provides data, and analysis of the data, and then an interpretation based on the data. It's all about data.

    My point is that Shiller comes to the discussion with real data that no one else is presenting - and provides actionable information.

    I found out recently that a dude named Peter Schiffer also was going around even presenting to the Mortgage Brokers convention back around 2006 or so, like going into the lion's den, saying that what they were doing was unsustainable. Rock on dude! But guess what. He is all hot air, all philosophy, all Austrian Economics or whatever school of *omics he subscribes to...and not a single iota of data to support his flip-of-the-coin-turned-out-to-be-correct-call.

    If he was the only one speaking against the grain - I would not have made a major life decision to forego buying a house and instead rent for the foreseeable future.

    But since Shiller provided 100+ years of data - as well as a prediction - just like how Jeremy Siegel provided 100+ years of data - as well as a prediction - these are the reasons why I have never bought a house - and why all of my savings are in equities. I made major life decisions on the advise of people who provided BOTH data as well as a prediction or recommendation.

    Recommendations alone (home prices are gonna go down duuude) are crap.



  • Report this Comment On April 10, 2012, at 1:39 AM, CaptainWidget wrote:

    I can find you data that proves, without a shadow of a doubt, that lifting weights makes you weaker.

    The question much weight do you put in data?

    You believe who you want to believe for whatever reasons you want. Just don't an idiot and try to put an extraordinary claim out there that agrees with your reasons, and discount evidence to the contrary because it doesn't fit with your biases. There were PLENTY of other people with good data predicting the housing collapse.

    And it's not like Shiller has always been right either. In 1996 he predicted real losses in the S&P 500 over the upcoming decade even when including dividends. In reality, including dividends and reinvestment, you would have doubled you money over that decade.

    Be careful who you worship. Everyone's been wrong before, including your gods.

  • Report this Comment On April 10, 2012, at 6:37 AM, duuude1 wrote:

    Hey Captain,

    And you're right, in a way, again. Data alone is similarly worthless. Lots of

    data is lots of worthless. There's tons of garbage "science" out there. Does

    that mean that data and science are worthless?

    <i>The question much weight do you put in data?</i?

    It's the data and the analysis and the prediction. Data alone is, like you said,

    open to question. The track record of the person doing that analysis and

    predicting is key. Kind of like Gardner's call for broader use of the CAPS

    system. Who has put themselves out there - ahead of the pack making

    predictions (commiting themselves in writing) - and who's history of right and

    wrong calls is open for review.

    It would be cool if you listed some of the people who you say had plenty of

    data and were similarly making the same calls - I just don't know who they

    were. More importantly, there were people with data saying home prices

    would never go down...right?

    <i>And it's not like Shiller has always been right either. </i>

    Is it reasonable to expect anyone to always be right? I weigh Stock Advisor

    recs more heavily since there is data posted and a history of being more

    right than wrong - but there are plenty of wrong calls. I didn't know Shiller

    back in 1996 so I don't know that specific call - but we all know the big call he

    made shortly after about the irrational exuberance in the tech stock market.

    So, in 2000 well before the event (which means he had to start writing and

    publishing a couple years before it went to press) Shiller put himself out

    there in writing and very much against the conventional thinking. Same with

    housing in his 2005 2nd edition - but he was cautioning before that as well.

    And you are even more correct about agreeing only with whoever's opinion

    you like. We all do that. Politics today is a great example of that.

    I'll give you a great example of that. Before 2007, when I showed people

    Shiller's 100+ year graph of home prices and where things were headed

    recently - do you know what every single person said? It's different today.

    When I show people at work Jeremy Siegel's 100+ year data on stocks

    beating every single other asset class including bonds, gold, homes... do

    you know what everyone says? It's different today.

    So you're right everyone believes who they want.

    But Shiller and Siegel, for example, make data-based predictions in writing

    and open themselves to very public ridicule by making calls that go against

    conventional thinking and the vast majority of the population. If you have

    other examples of people like that I'd love to see who they are.



  • Report this Comment On April 10, 2012, at 6:38 AM, duuude1 wrote:

    Wow - sorry about that formatting...


  • Report this Comment On April 14, 2012, at 1:43 PM, ScottmFool wrote:

    I can't help but notice that when there's a real estate-related article/video on Fool, in many cases the same 2 people (duuude1 and CaptainWidget) make the same comments on the merits of buying real estate. Over and over and over again.

    We get it, you don't like real estate. You like to rent. Congratulations.

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