Shilller: "Don’t Bet the Farm on the Housing Recovery"

Shilller: "Don't Bet the Farm on the Housing Recovery"

From Robert Shiller in the NY Times: Don't Bet the Farm on the Housing Recovery

MUCH hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?


Alas, the evidence is equivocal at best.


The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum.

Momentum only goes so far. And I think it is likely that prices will fall further in many bubble areas later this year as more distressed properties hit the market.


Shiller also argues prices might fall:

Consider some leading indicators. The National Association of Home Builders index of traffic of prospective home buyers measures the number of people who are just starting to think about buying. In the past, it has predicted market turning points: the index peaked in June 2005, 10 months before the 2006 peak in home prices, and bottomed in November 2008, six months before the 2009 bottom in prices.


The index's current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.

Usually I graph the total NAHB Housing Market Index. Here is a graph of the NAHB traffic of perspective buyers and two home prices indexes: the Case-Shiller Composite 10 (seasonally adjusted) and First American Corelogic's LoanPerformance HPI (NSA).


Click on graph for larger image in new window.


Although Shiller is correct about traffic index peaking in 2005 and declining sharply in 2006 (when prices started to fall), I think this isn't a reliable indicator of future house price movements. I think a better indicator that prices were about to decline in 2006 was the rapid rise in inventories in the 2nd half of 2005 and into 2006 - and I think we should watch inventory levels again this year.


I think the NAHB does provide hints about housing starts.