There’s no doubt the housing market is recovering. New and existing home sales are well above the levels of a year ago and inventories are at their lowest level in 13 years. Plus, home prices are 7% higher than they were a year ago, according to the latest S&P/Case-Shiller report.
But along with this good news are growing concerns that another bubble is forming in the housing market. Feeding those fears is a growing number of all-cash purchases for homes—primarily by speculators. They account for 27% or more of existing home sales every month over the past year, according to the National Association of Realtors.
The housing market “is becoming more of a speculative asset,” says Robert Shiller, co-creator of the S&P/Case-Shiller Index and a professor of economics and finance at Yale University. He expects the market will advance in the short-run but beyond that there’s “a great unknown."
Shiller says there is a lot of “speculative excitement” in specific housing markets like Phoenix, Las Vegas and Los Angeles—the first two among the worst performing markets after the last bubble burst. But he’s not convinced that housing bubble is forming.
“People shouldn’t assume the housing market is off to the races,” says Shiller. "[For] the country as a whole it’s rather unlikely that we’ll have another boom like the one we recently had because that's such a rare and unusual event."
The last boom was countrywide and financed by excessive leverage, he says.
Shiller says the housing market is still “very abnormal” because the government continues to underwrite most mortgages. And that support might not last because of the taxpayer revolt against excessive government debt, says Shiller, which would mean a decline in home prices.
His advice is to think of housing as a risky asset, as a portfolio manager would, and diversify. You could even rent a residence and put the money you would have used to buy a home into a “real diversified portfolio,” says Shiller.
Prospective home buyers, renters and sellers will get a better idea about the state of the housing market later this week when the government reports on housing starts Tuesday and the National Association of Realtors reports on existing home sales Thursday. On Monday, the National Association of Home Builders said its builder confidence index fell slightly to 44--its third consecutive decline.
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