Quotes off yesterday’s Case-Shiller Index report:
“I define a bubble as a time when people have extravagant expectations, and the expectations are driving home price increases,” said Robert Shiller, Case-Shiller index co-founder and Yale University professor of economics, in an interview with CNBC. “We don’t have the mindset of earlier this century.”
A drop in mortgage rates from the highs of the summer has not helped home sales, as higher home prices keep some buyers sidelined. The Realtors blame a steep decline in affordability, but Shiller disagreed.
“Affordability is still good compared to any time over the last 50 years. Mortgage rates are still around 4½ percent; that’s not high. Homes are still roughly, in real terms, where they were 25 to 50 years ago,” he said.
While inventories are still very low, they have come up about 6 percent from January to August, and that may ease price gains as well.
“With survey evidence pointing to a significant increase in the share of homeowners who view this as a good time to be marketing and selling a home, housing inventory will continue to rise,” noted Paul Diggle at Capital Economics. He is predicting just an 8 percent annual gain in home prices for all of 2013.
The wild card continues to be investors, who made up anywhere from 33 to 45 percent of homebuyers in September, depending on varying surveys. With prices rising and fewer distressed homes on the market, some investors are pulling back on purchases. The question remains, what will they do with the thousands of properties they already own?
“All these institutional investors are going to behave differently than the homeowner of the past,” noted Shiller. “That’s another reason to suspect that there could be a rapid turn down in the housing market, because these investors are not going to sit tight when home prices start falling. If they think they’re going to continue falling, they’ll get out.”
Shiller said he sees a tilt in public demand away from owner-occupied housing toward rental housing, even as the economy recovers. Homeownership has fallen from a high of 69.2 percent in 2004 to 65 percent in the second quarter of this year, according to the U.S. Census. He called it “good and natural” that tastes have changed.