Tags: Shiller | housing | market | risks

Robert Shiller: Housing Market Still Plagued with Risks

Wednesday, 28 Nov 2012 08:27 AM

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Home prices might be improving, but it’s way too early to claim victory over the housing bust, said Yale economist Robert Shiller, architect of the Standard & Poor’s/Case-Shiller home price index.

Shiller’s widely followed 20-city index revealed earlier that home prices rose 3 percent on year in September and 3.6 percent on year during the third quarter.

Prices could continue to rise 3 percent in the near future, just above inflation, though too many unknowns threaten that tepid pace.

Editor's Note: The Final Turning Predicted for America. See Proof.

Incomes aren’t rising as they have in the past, and meltdowns in other parts of the world could send shockwaves to the U.S. economy and dampen the sector’s still-lackluster recovery.

“I have been saying it’s a plausible scenario in which home prices will go up 3 percent a year for the next some years. But people haven’t resolved their economic situation yet, and we have threats from abroad, in Europe and Asia,” Shiller told CNBC.

“I still think it’s a risky market.”

Add to general economic uncertainty that millions of homes are in foreclosure or soon will be, which will further pressure prices down.

“The risk about foreclosures is that we will see a lot more defaulting homeowners, because even though prices are up they are not very much, so we still have probably something like 10 million households that are underwater on their mortgages — they are owing more than they own,” Shiller said.

“A lot of these will turn into new inventory of unsold homes after they are foreclosed. Unless something changes, we still have that downward pressure.”

Some states make it harder for financial institutions to foreclose on properties, which could make the housing sector appear healthier than it is.

Other states, meanwhile, are seeing noted improvements, especially in states like Arizona, which got hit hard during the bust that prices may have attracted speculators.

“I think people underestimate the risks in the housing markets. I don’t know why it is, but people think it goes monotonically in one direction. It can take twists and turns just like the stock market and I do think that some of the states that have gone up a lot do have a lot of speculative buying,” Shiller said.

“You can sense it in the air. Phoenix is our strongest city. If you go and read some Phoenix newspapers, they are filled with stories of some people who think that we are off to the races again,” Shiller added.

“We probably do have lots of people buying second, third or fourth houses. But that’s not everybody. There [are] a lot of disagreements, a lot of uncertainties still out there.”

Meanwhile, market talk is growing that the mortgage interest deduction, a popular item revered by many when it comes to filing taxes, might come under scrutiny amid talks to steer the country away from the fiscal cliff, a combination of tax hikes and spending cuts due to take effect at the same time at the end of this year.

Failure on the part of Congress to avoid the cliff could send the country into a recession next year, and many tax deductions today are going under the microscope and into the spotlight.

Eliminating the popular tax deduction for homeowners could convince more would-be homeowners to rent.

“This sudden attack on the mortgage deduction is news. I think five or 10 years ago, we would have thought it would have been possible. There wasn’t any risk of this elimination priced into the market until now,” Shiller said.

“Now, of course, it makes home ownership less attractive. What it might do is cause a shift from buying to renting,” Shiller added.

“We’ve already seen that trend developing. There’s a lot more rentals being manufactured and people are switching toward renting. But that wouldn’t bode well for the housing market.”

Others echoed Shiller, pointing out the housing market is showing signs of recovery but is in no way bolting out of its hole.

“I think it’s a stabilization on the sales side that’s probably helping with the prices here,” Sean Incremona, senior economist at 4Cast Inc. in New York, told Bloomberg.

“We’ve had several years now for the housing recovery to sort of catch its feet, and it looks like we are starting to crawl out of the giant hole that we dug into from the financial crisis.”

Editor's Note: The Final Turning Predicted for America. See Proof.

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