Thursday, January 27, 2005

Will housing prices keep rising? Economist Robert Shiller discusses the enigma of market highs and lows

Booms and Bubbles
Will housing prices keep rising? Economist Robert Shiller discusses the enigma of market highs and lows
‘There will always be bubbles’
By Karen Lowry Miller
Updated: 6:03 p.m. ET Jan. 27, 2005

Jan. 27 - Robert Shiller will publish the second edition of his book “Irrational Exuberance” (Princeton University Press) this spring. Noted as a rare voice who predicted the stock market crash in 2000, the Yale economist has become a sort of bubble guru and was part of panel discussing bubbles at the World Economic Forum meeting in Davos on Thursday. He has now added a chapter on real estate to his book and is also launching a company that will sell futures allowing people to hedge against movements in housing prices in a given city.

Under SEC rules, Shiller may not discuss his yet-to-be-published predictions about real-estate bubbles while the review of his corporate application is pending. But he elaborated on some of his already known opinions about real-estate prices in a conversation with NEWSWEEK’s Karen Lowry Miller at the Swiss ski resort. Excerpts.

NEWSWEEK: What can you say about your outlook for housing prices. Is it a bubble?
Robert Shiller: I’m not objective any more because I will have a financial interest [when the new company is launched]. I can’t be objective so I won’t say. If people talk about a bubble, they think in terms of deflating or bust. But the real question is, how it will look longer term? As I’ve said in the past, I don’t think housing prices will be higher five to 10 years from now.

Is it possible to spot a bubble?
It is possible for people who follow these things carefully. Most people are not professionals. In 1999 to early 2000, enlightened open-minded people recognized it, but markets are driven by the unenlightened.

Why are we in a world of bubbles now? Is it thanks to low interest rates for so long?
It’s not all due to [U.S. Federal Reserve Board chairman] Alan Greenspan. In my book I have 12 precipitating factors. Monetary policy is one, but not the first.

What is the main one?
The main one is the rise of capitalism around the world. For the last couple of decades there’s been a greatly increased public acceptance of capitalist institutions. As I’ve written, there’s been a change in perceptions. In an increasingly capitalist world, it’s everyone for him or herself. The value of property is much more on people’s minds. In the 1950s, when economists did talk about it, they said prices are driven by construction costs. The real driving force in real estate and stock markets is the sense that, sure it can go down, but it will go right back up, so don’t worry.

What is a bubble exactly?
A bubble means enthusiasm grows for assets and people don’t see the limits, but there are limits. Actually, bubble is a misnomer. Even in the stock market. A bubble bursts in a flash, and seconds later it is gone forever. But [on] Oct. 28-29, 1929, the stock market fell 24 percent in two days. By early 1930 it was back to the peak, then there was a series of steps down to 1932. There was a boom in the stock market [from] 1932-37. No one remembers, but it was up just as much in the 1930s as in the 1920s. The reasons bubbles are so enigmatic is because you never know when they are over.

So what shall we call it?
I’m always trying to find a better metaphor. I thought of random walk, but it exaggerates the randomness. We need a new metaphor for upward momentum

Hot-air balloon?
Maybe. They have to come down sometime, but if you keep throwing sand bags out they rise up again for awhile.

What is the next bubble? If money pulls out of real estate, where can it go next?
I have to say that is an intellectual fallacy. The value of something can go down without money having to go somewhere else. It’s theoretically possible for all markets to go down at the same time. If people change their minds and get depressed, they just won’t spend or invest.

Now that we know more about them, can we prevent them?
Bubbles are a little like wars. There is a half-life of maybe 50-100 years, then people forget. There will always be bubbles.