Dr. Robert Shiller, one of the creators of the famed Case-Shiller Housing Index expresses his concerns about the formation of a new housing bubble in this interview with Fox Business Channel. At the beginning of the interview, Dr. Shiller points out just how much government policy is supporting the housing market through Fed policy, Fannie, Freddie, FHA and the tax code. In fact, he is surprised that despite so much support, the housing recovery is not stronger.
More importantly, he points out that when you take into account the record low mortgage rates that have driven the housing market, home price appreciation, in real terms, is more moderate than people think. Although he is not predicting that home prices will go down in the next year or so, he is concerned that as interest rates return to historical norms, it will have a dampening effect on both the housing market as a whole and home prices in particular.
We have seen meaningful price appreciation in most housing markets over the past 24 months. With double digit annual gains and bidding wars for homes being reported in some markets, it is tempting to think we are at the beginning of another bull market in housing. But the big questions that remain are how strong is the current recovery and how sustainable is it?
While there are certainly signs for optimism, there are also strong indicators for caution as well. As Rick Newman points out in his article in US News and World Report, there are 5 Reasons the Housing Recovery Remains Wobbly. They are:
1. Lack of good land for development;
2. Record low interest rates are due to rise;
3. Recovery is dependent on government aid;
4. Foreign buyers are driving up prices; and
5. The recovery is focused on certain markets (see 4 above).
While Mr. Newman focuses on 5 signs that homes may be overpriced, the key take away is that a homebuyer’s biggest risk is primarily in the next few years. If you are buying a home today as a short-term investment, you may want to think twice. However, if you are buying a home as a long-term residence, now is probably as good a time as ever. With 30-year mortgages at the artificially low rate of 3.5% you can lock in your housing costs for the next 30 years and enjoy the savings when interest rates return to their historic norms.
Unfortunately, even if your plan is to live in your new home for 10 years or more, life has a funny way of interrupting those plans. That is why it is always prudent to have some downside protection in case your circumstances unexpectedly change.
In an interview with the WSJ, housing guru and creator of the S&P/Case-Shiller Housing Index Robert Shiller states that despite recent improvements in housing prices, risk still remains in the market. While Shiller sees upward momentum, he is not ready to say the market has bottomed out. He does not see much enthusiasm in the market and has concerns regarding the impact of the high level of government support for housing (i.e. low interest rates and the government backing almost 90% of all mortgage originations through Fannie & Freddie). While one could say he is cautiously optimistic, he attributes much of the recent price spikes in some indexes to a slowdown in foreclosures and some markets overshooting on the downside. In conclusion, he sees today as an “OK” time to buy a house as most homes appear to be fairly priced and mortgage rates are near historic lows. He is predicting modest price appreciation more in line with historic norms of 1% – 2% per year. If you are buying a home to live in, now is still a good time to buy but if you are buying a home strictly as an investment, you will want to be careful.