Why the Housing Market Won't Crash Like 2008: Robert Shiller

A sharp slowdown in the housing market has led to worries that a repeat of the subprime meltdown of 2007–08 might be brewing, but the Nobel Laureate economist who predicted that crisis believes that such fears are overblown today. While noting that home prices having been rising since 2012, Professor Robert Shiller of Yale University told CNBC: "A housing bubble is not much in evidence...It's not the same. It's more placid." He added, "I don't expect a sharp turn in the housing market at this point."

The SPDR Homebuilders ETF (XHB) plummeted by 81% between March 17, 2006 and March 9, 2009, based on adjusted closing prices from Yahoo Finance. This year, as of the Oct. 29 close, it is down by 32% from its 52-week high set in intraday trading on Jan. 24. Some recent signs of stress in the housing market are summarized in the table below.

Housing Market: Signs of Stress

Rising mortgage rates
Rising home prices
Falling prices of housing-related stocks
Housing starts down
Sales of new homes down
People staying in old homes longer

Sources: CNBC, MarketWatch, Goldman Sachs

Relevance for Investors

A bubble in housing prices and the subsequent subprime meltdown were key factors spurring the broader financial crisis of 2008. House prices shot up in a speculative frenzy, lending institutions were unduly lax in extending credit, many home buyers assumed mortgages that were beyond their long-term capabilities to finance, and eventually a wave of defaults by borrowers threatened the solvency of some key financial institutions. This, in turn, led to a severe decline in liquidity, a stock market collapse, and a collapsing economy worldwide.

Shiller had foreseen a chain of events along these lines when other notable figures in finance and economics, such as former Federal Reserve Board Chair Alan Greenspan, did not believe that a housing bubble was in the making. Memories of 2007–08 are producing the worries today that a cooling off of the housing market might represent a bubble in the initial stages of bursting.

"The subprime crisis was a history-making event," Shiller told CNBC, noting that it included the sharpest up and down movement in home prices in U.S. history. Best known for developing the CAPE ratio to analyze stock market valuations, Shiller also is the co-developer of the Case-Shiller Home Price Index. The latest release, in September, showed a slowing of home price increases in July, per CNBC. Nonetheless, the average price of a new home has risen by more than 60% since late 2011, per CBS News.

"I don't expect a sharp turn in the housing market at this point." —Robert Shiller, Nobel Laureate economist

Source: CNBC

The rate on the benchmark 30-year fixed rate mortgage is now around 5%. This is the highest level since 2011, per a recent report from Goldman Sachs, which adds that the Housing Affordability Index is near its lowest level in 10 years. In September, housing starts fell by 5.3% and new home sales by 5.5% from August, per Goldman. Compared to Sept. 2017, new home sales were down by 13%, per U.S. Census Bureau data cited by CNBC. 

Young people aged 25 to 34 from the so-called millennial generation have a home ownership rate that is about 8% lower than the baby boomers and Gen X people had at similar ages, per data from the Urban Institute cited by CBS. High student loan debt and low wage growth are factors behind the low rate of home ownership among millennials, leading to about 3.4 million fewer homeowners in total nationwide that otherwise would have been the case, per the same sources.

Meanwhile, the average tenure of people in their homes is increasing, partly in response to the affordability problem with new homes, MarketWatch reports. Based on analysis by Attom Data Solutions, that report indicates that the average existing home that changed hands in 3Q 2018 was occupied by its previous owner for 8.23 years, almost twice the length of time in the year 2000, when Attom's data begins. The same story cites data from CoreLogic indicating that 2.2 million homeowners have underwater mortgages, owing more than the houses are worth, and that another 550,000 have home equity of less than 5%, meaning that real estate broker commissions and other transaction costs are likely to leave them with no profit on a sale.

Looking Ahead

A contrarian move might be to invest in beaten-down housing-related stocks. However, a severe bear market or an economic recession would spur yet more losses. Additionally, a study from Fannie Mae cited by CBS projects stated that, unless demand from millennials increases, aging baby boomers seeking to downsize might have to accept yet lower prices for their existing home, depressing the housing market yet further.

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