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Tuesday, December 11, 2018

A comment on Professor Shiller's "The Housing Boom Is Already Gigantic. How Long Can It Last?"

by Calculated Risk on 12/11/2018 03:52:00 PM

Last Friday, Professor Robert Shiller wrote in the NY Times: The Housing Boom Is Already Gigantic. How Long Can It Last?

We are, once again, experiencing one of the greatest housing booms in United States history.

How long this will last and where it is heading next are impossible to know now.

But it is time to take notice: My data shows that this is the United States’ third biggest housing boom in the modern era.
First, it is important to note that Professor Shiller is discussing house prices, as opposed to housing activity (usually a "housing boom" would refer to new home sales and housing starts).   This is not one of the "greatest housing booms" in terms of new home sales and housing starts - in fact, housing activity is still somewhat low historically.

More Shiller:
Even after factoring in Consumer Price Index inflation, real existing home prices were up almost 40 percent during that period. That is a substantial increase in less than seven years. In fact, based on my data, it amounts to the third strongest national boom in real terms since the Consumer Price Index began in 1913, behind only the explosive run-up in prices that led to the great financial crisis of a decade ago, and one connected with World War II and the great postwar Baby Boom.
Here Shiller is measuring from the house price bottom - when prices were driven down by significant distressed activity - to the current top.   So perhaps some of the recent increase was a bounce back from all the distressed selling.   Shiller dismisses this explanation:
The simplest narrative being given for the current boom is just that the 2008-2009 financial crisis and the so-called Great Recession are over and home prices are returning to normal.

But that explanation does not cut it either. In September they were 11 percent higher than at the 2006 peak in nominal terms, and almost as high in real terms. This is not a return to normal, but a market that appears to be rising to a record.
Nominal prices are 11 percent higher than the previous peak, however real prices are about 9 percent below the previous peak (I wouldn't call that "almost as high").

Also Shiller leaves out a key point - there is an upward slope to real house prices over time.   Shiller has calculated an upward slope of about 0.2% per year for real prices.  I think it is higher.

Shiller did an awesome job of piecing together various price indexes to obtain long term prices.   However, as I've noted before, if Shiller had used some different indexes for earlier periods, his graph would have indicated a larger upward slope for real house prices. Here was an earlier post on this: The upward slope of Real House Prices. A few excerpts from my earlier post:
It is important to realize that Professor Shiller used the quarterly Case-Shiller National index starting in 1987. From 1975 through 1986 he used what is now called the FHFA index. He used other price indexes in earlier periods.
The FHFA index used by Shiller was based on a small percentage of transactions back in the '70s. If we look at the CoreLogic index instead, there is a clear upward slope to real house prices.

If Professor Shiller had used the Freddie Mac quarterly index back to 1970 (instead of the PHCPI), there would be more of an upward slope to his graph too. So it is important to understand that for earlier periods the data is probably less accurate.
The indexes I used captured a larger percentage of the market than the indexes Shiller used.

Tom Lawler has also written in depth about this: Lawler: On the upward trend in Real House Prices

During the housing bubble, the difference between a slight upward slope in real prices (0.2% per year according to Shiller's index) and a slightly larger increase in real prices using other indexes (probably between 1% and 1.5% per year) didn't make any difference; there was obviously a huge bubble in house prices.  But when comparing price "booms" over time, there is a huge difference.

If we use 1.5% per year for real price increases, the current "boom" in prices would be the fourth largest since the 1970s (and only about half the size of the late '70s and late '80s price boom), and if we use a 1.0% real increase, the current "boom" is on the same order as the late '70s and '80s price booms.

No big deal, and definitely not a "gigantic" boom in house prices.

Note: Following both the '70s and '80s prices booms, price increases slowed significant and mostly moved sideways for some years in nominal terms.  Maybe that will happen again.