Be Warned: Mr. Bubble’s Worried Again

Robert Shiller is worried about a housing bubble. I also think the housing market is overheated, but Shiller is far too much of a bear for me. He gets a lot of credit for “predicting” the stock market crash in his book “Irrational Exuberance,” but Shiller had been bearish since 1996. He’s a bear who’s always warning about a bubble.

The problem I have with Shiller’s real estate analysis is that he’s compiled a chart going back to the 19th century. It’s very unfair to compare today’s prices to prices so long ago. Today, we have a very mature and sophisticated financial marketplace. There are countless regulations, plus, believe it or not, we have smarter consumers. Borrowers have dozens of options, and the mortgage market is gigantic. The old real estate industry was supported by thousands of tiny George Bailey-type savings and loans. To compare today’s prices to the real estate market of so long ago, ignores the huge advances that have been made.

In Shiller’s world, it’s nothing but boom and bust. But you can have an asset soar and not always have a bubble. The stock market soared in the 1950’s. In fact, the period from 1949 to 1956 was probably one of the greatest bull markets of all-time. But people don’t think of it as a bull market because it never crashed. Also, just because an asset is overpriced, doesn’t mean it’s about to crash. Prices can stay high for a long time.

The boom in real estate has been driven by important changes. We’ve had the lowest interest rates in decades, plus housing prices were cheap due to the surge in tech stocks. I don’t believe that everyone in American woke up one day and suddenly became “irrational.” I saw Shiller on the news today and he claimed the public’s opinion was one great big, “don’t worry, housing prices will go up for ever!” Bears always do this. I don’t know one person in 10,000 who would say that.

We know housing prices have gone up a lot. They certainly can’t keep up this growth rate, and prices are probably due to fall (Shiller expects a 40% correction). But there are several ways out of a bull market besides a bursting bubble.

Posted by on August 26th, 2005 at 1:18 pm


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