Wednesday, April 06, 2005

Talk of the Nation: Schiller on Real Estate

by Calculated Risk on 4/06/2005 07:27:00 PM

Robert Schiller, Yale economics professor and author of "Irrational Exuberance" was on NPR's Talk of the Nation today. Click on listen.

A few Schiller quotes:

"In a sense the irrational exuberance never left the housing market. The housing market started to boom in the late '90s and it continues to go up. It wasn't interrupted by the earnings drop that we saw in stocks in 2001. It has just kept going."

"I think its one of the amazing facts about statistics and econometrics that no one had collected a long time series of home prices in the U.S.. How can you get perspective about whether there are bubbles or not, if no one collects the data?

What I did is I went back and I found various fragmentary home price indexes that kept quality constant and linked them together and added, filled a gap. So I have a series back to 1890. When I plotted that I was quite surprised to see what happened.

The U.S. has basically has never been in a bubble like the one we are in now, with the possible exception of the period right after WWII when the soldiers came home and were bidding up home prices. It is a very rare phenomenon. So people who claim to have done statistical analysis - they can't have done it, they haven't had the data!"

"Some of these people will realize that their mortgage is worth - that the debt is greater than the value of the house and they will walk away. They will say that 'I'm making payments, huge payments on this house and its not even worth what I'm owing". If, as I expect, in many places prices will fall, defaults on mortgages will go up. There will be some disruption in people's lives."
How much overvalued is the Real Estate market?
"That varies very much by city. We looked at ratios of median home price to per capita personal income. We find that in many places in the U.S. that is only about 2, the median home is only like 2 years income or 3 years income. But in other cities it is 10 years income. So - I think that is getting a little - more than a little high. What supports it? Why would you live in a city were homes cost 10 years income, when you can live in a city were they cost 3 years income or 2 years income? You might say some cities are better than others and they have better job opportunities than others. But I think they are a bit overrated."
In answer to a question:
"Miami had one of the most famous home price bubbles in 1925. In that year people began to think that land was running out in Florida and that you'd better buy now or it will be too late. Promoters started traveling all over the country and people started flowing in - there was a huge immigration into Florida at that time - but then the bubble burst in 1926. And it didn't rekindle in Florida until recently.
I think what is happening in Florida then and now are similar. Its a glamour story, a story of excitement, a story that land is running out that suddenly becomes prominent in people's minds."

Much more in interview. Enjoy!