Shiller on U.S. housing market: 'It reminds me of 2006'
Now that home price growth has slowed for five straight months, there appears to be no question that the U.S. housing market is taking a turn.
“This is a sign of weakness that we’re starting to see. And it reminds me of 2006 … Or 2005 maybe,” Yale Economics Professor and Nobel Laureate Robert J. Shiller told Yahoo Finance’s Midday Movers this week.
‘That’s something that can’t continue’
On Tuesday, the S&P CoreLogic Case-Shiller national home price index reported a 5.8% annual gain in August, down from 6% in the previous month — the first time in a year that annual gains fell below 6%. The home price figures followed a decline in existing and new home sales.
“The housing market has a momentum problem,” said Shiller. “We’re seeing a clipping of momentum at this time. It’s hard to identify turning points even in the housing market. It has been going up linearly for six years now, that’s something that can’t continue.”
The momentum started to noticeably lose steam in July. Economists have already called a peak of certain housing market indicators and adjusted their forecasts downward. Michelle Meyer, an economist at BAML, recently noted that existing home sales peaked in November 2017, adding that in previous cycles a peak in existing home sales usually precedes a peak in home price growth.
The national median existing-home price is expected to rise to around $266,800 in 2019, up 3.1% from 2018, according to the National Association of Realtors.
“Home price appreciation will slow down — the days of easy price gains are coming to an end — but prices will continue to rise,” said Lawrence Yun, chief economist at the NAR, in a press statement on Friday. He also estimated that existing-home sales will end 2018 at a pace of 5.345 million — a 3% decrease from a year earlier. Next year, sales are forecasted to increase to 5.4 million, a 1% increase. “The forecast for home sales will be very boring – meaning stable,” said Yun.
‘The most severe drop in the U.S. market since my data began’
During the Great Recession, home prices fell by as much as 35% in some markets and plummeted at an annual rate of 4%. Some are beginning to wonder if prices will suffer the same fate this time around.
“It could happen but it’s not likely it will be so severe. You have to remember, that the drop in home prices in the financial crisis was the most severe drop in the U.S. market since my data began in 1890,” Shiller said. “I wouldn’t expect anything as severe as the great financial crisis coming on right now. There could be a significant correction of bear market. I’m waiting and seeing now.”
In 2006, when home prices peaked and then tumbled, mortgage default rates bottomed out and started a three-year surge, according to David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices.
“Today, the mortgage default rates reported by the S&P/Experian Consumer Credit Default Indices are stable,” Blitzer stated this week. “Without a collapse in housing finance like the one seen 12 years ago, a crash in home prices is unlikely.”
The biggest risk now is if the broad markets go down, according to Shiller, underscoring how the housing market is an important element of economic activity.
“If people start getting pessimistic about housing … pull back and don’t want to buy, then there will be a drop in construction jobs and that could be a seed for another recession,” he said. “We are overdue for another recession. These things come with regularity.”
Amanda Fung is an editor at Yahoo Finance.
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