Interesting real estate article...Karl Case and Robert Shiller comment on the housing recovery
When it comes to predicting housing bubbles, you may get a better guess from a sociologist than an economist, said famed economists Karl Case and Robert Shiller in a rare joint presentation at the New England Mortgage Bankers Conference in Newport, R.I., this morning.
Case and Shiller discussed a new paper they have written that focuses on how beliefs about home prices do more to fuel housing bubbles than actual changes in interest rates.
For 10 years, the pair has surveyed buyers across the country about their expectations for home prices, asking how much they thought their home's value would change over the next year and how much it would change each year for the next decade.
The pair suggest that when people expect prices to rise faster than current interests rates over the coming decade, this helps drive purchases, and the differences between expectations and interest rates track more closely to the changes in sales than changes in interest rates themselves.
"It's the people who have the highest willingness to pay that drive the price," Case said. Looking back at buyer's expectations during the bubble, when people thought their houses would be worth as much as 17 percent more the next year, he said, "the only thing more astounding than people's expectations was what actually happened."
Overall, both were tempered in their expectations for the housing market. Shiller half-jokingly said there was a 40 percent chance that housing was in recovery, while Case said he was felt housing starts were headed in the right direction and likely to cross 800,000 next month. But he also warned homebuilders to hold off on uncorking the champagne until they crossed 1,000,000.
"Cross your fingers and say a little prayer," he said.
When it comes to predicting housing bubbles, you may get a better guess from a sociologist than an economist, said famed economists Karl Case and Robert Shiller in a rare joint presentation at the New England Mortgage Bankers Conference in Newport, R.I., this morning.
Case and Shiller discussed a new paper they have written that focuses on how beliefs about home prices do more to fuel housing bubbles than actual changes in interest rates.
For 10 years, the pair has surveyed buyers across the country about their expectations for home prices, asking how much they thought their home's value would change over the next year and how much it would change each year for the next decade.
The pair suggest that when people expect prices to rise faster than current interests rates over the coming decade, this helps drive purchases, and the differences between expectations and interest rates track more closely to the changes in sales than changes in interest rates themselves.
"It's the people who have the highest willingness to pay that drive the price," Case said. Looking back at buyer's expectations during the bubble, when people thought their houses would be worth as much as 17 percent more the next year, he said, "the only thing more astounding than people's expectations was what actually happened."
Overall, both were tempered in their expectations for the housing market. Shiller half-jokingly said there was a 40 percent chance that housing was in recovery, while Case said he was felt housing starts were headed in the right direction and likely to cross 800,000 next month. But he also warned homebuilders to hold off on uncorking the champagne until they crossed 1,000,000.
"Cross your fingers and say a little prayer," he said.
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