Thursday, May 11, 2006

Shiller: Real Estate could lead World into Recession

by Bill McBride on 5/11/2006 04:07:00 PM

From the Shiller sees U.S. rally cutting out, Feels housing slowdown could be trigger

Stock markets are still expensive, and investors could be in for an unpleasant surprise once corporate profits begin to weaken, says the Yale University economist who predicted the crash of 2000-2002.
Mr. Shiller said the Standard & Poor's 500-stock index is still valued at about 27 times earnings -- far below the bubble-era peak of 46 but still well above the long-term average of about 15. Those numbers are based not on last year's earnings but on a 10-year average of profits.

"I think we could have a number of disappointing years," the economist said in an interview yesterday with The Globe and Mail. "We see earnings growing rapidly, but I feel skeptical about [the sustainability of] that."
The trigger for a profit slowdown, he suggests, could be a fall in consumer confidence and U.S. housing prices, the signs of which are beginning to appear in places such as San Francisco, Boston and Miami. Mr. Shiller updated Irrational Exuberance last year and devoted a large chunk of it to his view of speculative bubbles in real estate.

"It looks like we're at the peak" in U.S. housing, he said. "But I can't claim victory yet.

"The equity bust of 2000 produced a mild recession, and was rather short-lived. It's very hard to predict . . . [but] if the real estate market does tank, it will cause a worldwide recession." Falling real estate values "will probably be spread over many countries."