The housing market is tough to read these days. The latest housing data tell a choppy story: On the one hand, existing home sales had fallen for three consecutive months as of February. New home sales were also down in February. While housing construction increased overall for the month of March, construction of single-family homes (the most important measure) fell nearly 1%. 

Yet the S&P/Case-Shiller Home Price Index, which measures home prices across 20 major metropolitan areas, registered an increase for January after adjusting for seasonal factors. That marks the eighth straight month of home price increases, and the closest to a positive year-over-year increase in three years.

Examining some of the latest bank earnings reports continues to illustrate a troubling story for housing. JPMorgan Chase (NYSE: JPM) reported an increase in mortgage default rates in the first quarter. Bank of America (NYSE: BAC) reported its mortgage division continues to struggle, as loan losses grew to 4.44% of total loans in the first quarter, compared with 2.85% last year.

To understand the state of the housing market now I spoke with the co-creator of the S&P/Case-Shiller Home Price Index, Robert Shiller, a professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC. He is also the author and co-author of numerous books, the most recent being Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.

Here is an edited transcript of our conversation.

Jennifer Schonberger: The latest Fed minutes showed the central bank is concerned the activity in the housing sector could be leveling off. What is your take on the state of the housing market now? Do you share the same concern as the Fed?

Robert Shiller: Yes. Home prices have been going up for nearly a year now, according to our data, the S&P/Case-Shiller indices ... Normally we could extrapolate that kind of upward trend because historically home prices have shown a lot of momentum. But I think we're in a very unusual circumstance because of the massive bailouts, the homebuyer tax credits, the Fed's purchase of mortgage-backed securities -- and these things are coming to an end. So it's an unusual period. So I don't trust the trend that we have. I'm worried that it might get reversed.

Schonberger: Speaking of momentum, I remember in our last discussion that momentum and confidence levels are keys in your view to examining the health of the housing market. Is momentum waning now?

Shiller: In terms of the S&P/Case-Shiller numbers, the rate of growth of home prices has fallen. If you look at them in nonseasonally adjusted terms -- just the raw data -- they're falling. But if you seasonally adjust them they're going up. But they're not going up so briskly as they were in the middle of 2009. That's one leading indicator. There are others as well. One that I particularly like is the National Association of Home Builders Housing Market Index, which is based on a survey of their members. That has turned down starting last fall. So we've had months of decline in homebuilders' impressions as to the strength of the market.

Schonberger: What are the chances for a double dip in the housing market now?

Shiller: It's hard to quote probability because people who do that rely on statistical analysis and past data ... If you just looked at the trend of home prices you might conclude the probability is very low. We're less than a year into this boom, and booms have lasted much longer than that. That's why it's very hard to compute probabilities. But I think that it doesn't look real. It doesn't look like this is really another boom like the one that we had in the 2000s.

Schonberger: What does this mean for the economic recovery and the sustainability of the recovery?

Shiller: Well housing and construction expenditures have typically been 4 to 6% of GDP, and they're very depressed right now. It means that that component may not be coming back. But I think it goes beyond that. In many ways the housing situation is part of our impressions as to what is going on and so it has an impact on confidence, which is hard to quantify again, but I think potentially very real.

Schonberger: Where are we in the cycle for commercial real estate?

Shiller: It's still negative. The latest data that I've seen has shown price declines. We still have a financing problem. Of course that's intertwined. The reason that lenders don't want to renew loans for commercial real estate is that they see prices falling and so they don't want to give the same terms.

Schonberger: Last we spoke in November you were skeptical of the stock market's run in such a short period of time, but you said stocks still looked like good investments. What is your outlook for the stock market now?

Shiller: It's similar. The P/E ratio, as I compute it, is around 22. That's price-to-10-year average earnings. Some people call that cyclically adjusted price earnings. That's kind of high, but unfortunately other assets seem to have low yields as well at this time. So it's not so clear that you don't want to have something in the market. I guess I'm not enthusiastic about big exposure to the stock market, but I think it makes sense to have some exposure.

Schonberger: Thomas Hoeing, president of the Kansas City Fed, is worried about a new asset-price bubble, given low rates. Do you agree, or will rates go up without the Fed's doing because of deficit concerns?

Shiller: We have had kind of a mini-bubble in the stock market and the housing market. It wasn't just because of rate cuts. It was also because of government stimulus and bailouts. So the question is: Are we at risk for even more price increases, and another bubble? I think we are at risk, but I'm not predicting it. I think it's more likely we don't do so well from here.

For Shiller's take on how to restructure Fannie Mae and Freddie Mac click here.