Housing Is "In a Precarious State," Yale's Robert Shiller Says

The housing recovery is "in a precarious state," says Robert Shiller, Yale professor, author and co-creator of the S&P Case-Shiller Index, taking a much more pessimistic view vs. his comments here last July.

Shiller's eponymous index, which has risen for seven straight months through December, "shows some weakening of the upward burst" from last year, but is still going up on a seasonally-adjusted basis, the professor says. "If I were to forecast based on my usual models of years ago I would think we've turned a corner, we've bottomed and we're turning up."

But that's a very big "if" and Shiller says there are reasons to wonder whether this time is different, or certainly to be worried about the sustainability of housing's recovery:

• -- Only the Shadow Knows: Housing experts say there's anywhere from 2 to 5 million homes ready to come on the market, due to pending foreclosure. In addition to this so-called shadow inventory, "I think people will become less resistant to defaulting on their mortgage," Shiller says. "That's a real cloud on the horizon."
• -- Your Lender, Uncle Sam: The government has a hand in about 90% of all mortgages these days and Shiller is "not comfortable" with that level of involvement. The immediate problems, he says, are this spring's planned expiration of the first-time home-buyer tax credit and the Fed's mortgage-backed securities purchase program. "We can't just slam on the brakes and withdraw that -- we could but I'd hate to see what happens," he says. "When [government programs] do end there's going to be a psychological component of that ending as well, which is really hard to predict."

For that reason, Shiller expects some or all of the government housing programs will be extended, raising the broader question of how the government removes all the liquidity that's been provided.

"It's very hard to get out of this mess," he says. "We have to transition to a more [market-based] economy. It's going to be a difficult transition. That's why I have worries for years forward."