Shiller: No Bubble in Housing, But Keep an Eye on Stocks

Sunday, 01 Dec 2013 02:46 PM

By Dan Weil

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Nobel Prize-winning economist Robert Shiller, co-creator of the closely watched S&P Case/Shiller Home Price Index, and DoubleLine Capital CEO Jeffrey Gundlach see no bubble in the housing market even though the index has soared 13.3 percent this year through September. 

"We went through the biggest housing bubble in U.S. history in the 2000s, and there is a knee-jerk reaction among some people who think maybe we are doing that again," Shiller told Barron's.

"But you have to consider that these are very rare phenomena, and it was such a decisive break at the end of the last housing bubble that we might not be psychologically ready for another bubble."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

Shiller's questionnaire of home buyers shows that expectations for home-price increases have fallen faster than mortgage rates since 2004. "So, people's views must be less and less sanguine," he said. 

"The latest survey we did, in May and June of this year, found that long-term expectations are picking up a little bit, but only incrementally."

To be sure, some cities are seeing booms, such as Las Vegas, Shiller said. "But I don't know where it is going." 

Gundlach told Barron's that even Las Vegas remains far below its peak of the mid-2000s. As for the national scene, "most investors, if they took a look at the housing data, would be surprised how weak it is, really," Gundlach said.

"Pending home sales are trending lower; existing home sales are trending lower. The absolute levels of housing activity have risen from the deficit of 2008 and 2009, but they have risen to the levels that used to be characteristic of the depths of a recession." 

We're really just bouncing up a bit from very weak levels that prevailed after the financial crisis of 2008-09, Gundlach said. "And much of the gain you have seen in housing prices over the last year is going to be falling off."

Shiller told Barron's that the U.S. stock market isn't in a bubble, either. His cyclically adjusted price-earnings (CAPE) ratio, which encompasses the past 10 years of earnings, now stands at 25.

Although that's well above its long-term average of 16, "it's not so much above average that I would disqualify stocks as an investment," Shiller said. But, he added, "I'm starting to get more worried about the market as it keeps going up. When CAPE gets as high as 28, stocks would start to look unattractive."

Shiller's comments on the U.S. stock market appear to echo those he made in Sunday's Der Spiegel. In an article with a Berlin dateline, Reuters quoted Shiller as telling the German magazine: "I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets."

"I am most worried about the boom in the U.S. stock market," Shiller said, according to Reuters. "Also because our economy is still weak and vulnerable," he said; he described the financial and technology sectors as overvalued.

Meanwhile, when it comes to U.S. Treasurys, Gundlach correctly predicted in July 2012 that the 10-year yield was bottoming around 1.4 percent. The yield was at 2.74 percent late Friday.

But now Gundlach is having second thoughts about his call.

"We might have a panic into Treasurys," he said. "I'm not saying it's the base case, but something shaky, maybe a recession or a problem internationally, could trigger that." Gundlach noted that Federal Reserve policy makers appear worried about deflation.

While Shiller and Gundlach played down the increasingly common talk of financial-market bubbles, Marc Faber, publisher of the Gloom Boom & Doom Report, is convinced that bubbles already are full blown.

"You have to say that we are again in a massive financial bubble in bonds, in equities, in [other] asset prices that have gone up dramatically," he told CNBC.

"Farmland is up 10 times over the last 10 years. Bitcoins are up now, and who knows what will go up next. We are in a gigantic speculative bubble."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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