Growth in home prices is slowing, and Robert Shiller, Yale professor and Nobel Prize winner in economics, said that could well be a sign of a downturn to come.
“I describe the current boom in U.S. home prices as the third largest boom since 1890. And so it’s big, and people are starting to think that housing is expensive, and that could lead to a turnaround and a drop in home prices,” Shiller said in an interview with Yahoo Finance at the World Economic Forum in Davos, Switzerland. “But I’m not ready to forecast that yet.”
Shiller pointed out that the National Association of Home Builders’ monthly index of builder sentiment rose in January following two months of sharp declines, showing builders are beginning to look more favorably at housing demand. And in most cities, the S&P CoreLogic Case-Shiller data – which Shiller co-created – has pointed to continued home price appreciation, albeit at a slower pace. The 20-city home price index rose 5.03% from a year earlier in October, based on the most recent release in December, from a downwardly revised annual gain of 5.2% in September.
However, Shiller said he has taken note of the past several months of weakness in the housing market. Most recently, the National Association of Realtors’ report on Tuesday showed U.S. home sales tumbled 6.4% month over month to their lowest level in three years, far outpacing the 1.5% drop predicted by economists. This extends a trend of declines in existing and new home sales in the latter part of 2018, which occurred against a backdrop of rising mortgage rates and land and labor shortages.
“The housing market, when it starts to slow, that’s a leading indicator that it could turn down,” Shiller said.
Shiller described the housing market as “remarkably trendy,” having gone up smoothly for about the past 50 years. Housing isn’t as easily tradable as equities or other financial assets, Shiller pointed out.
“You don’t have the smart money going in and out from day to day,” Shiller said. “[The housing market] shows momentum, and that momentum is slowing down a bit. There could be a reversal in home prices and a recession. But I’m not giving it a probability of greater than 50% for this year.”
The key factor leading to a contraction are changes in confidence, Shiller said. And on that front, President Donald Trump has delivered a bump to the housing market.
“I think Trump does have a psychological boost for the housing market because of who he is. He kind of exemplifies lavish living. He writes books about success. He’s our first motivational speaker president,” Shiller said. “His motivation will tell you that you have to live the life of a successful person.”
“That’s an important reason why people buy homes,” Shiller added. “They want to be part of the successful people in the country.”
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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