Tags: Shiller | home | prices | fair

Nobel Laureate Economist Shiller: Home Prices 'Low But Fair'

Wednesday, 29 Jan 2014 07:19 AM

By Dan Weil

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U.S. home prices soared 13.7 percent in the 12 months through November, according to the S&P/ Case-Shiller index of home prices for 20 cities.

But Nobel laureate economist Robert Shiller, co-creator of the index, isn't worried about the surge. While prices are only 7 percent below their 2006 peak in nominal terms, they're 30 percent away in real terms, according to the Globes newspaper of Israel.

"Prices are still low, but their level is fair at the moment," he tells the paper. "If we examine the history of prices since World War II, we can see that, over time, in real terms, prices have not risen, but have been stable. We have therefore returned to the nominal area in terms of prices."

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In any case, upward price momentum has weakened, Shiller notes. "Prices may continue to rise over the next couple of years, but not by much."

When it comes to U.S. stocks, Shiller shies away from calling them a bubble. "U.S. stock markets are a bit overpriced, but they're not super expensive," he explains.

"Profit forecasts are still good, so there is no need to dump all the shares. I advise keeping part of a portfolio in shares, of course on the basis of the risk level that each person wants."

As for the economy, "we're still licking the wounds of the great crisis, and it will take us more time to recover. The administration's policy has improved [the economy]," Shiller adds.

"But on the other hand, if there is another recession, the US administration will be less able to respond to it because it has already accumulated a lot of debt."

In the case of the Federal Reserve, it has now begun tapering its bond purchases. "How much longer is it possible to buy assets?" Shiller asks. "The recovery is slow, and it may take a lot more time."

As for the impact of tapering, "it will affect bond yields, but we don't need the program in ordinary times, and if investors' confidence is strong enough, and I think it is, the end of the program won't have a dramatic effect."

The Fed will probably decide to taper its bond buying by another $10 billion a month in Chairman Ben Bernanke's final meeting Tuesday and Wednesday, according to many experts.

The Fed agreed to its first tapering in December, pushing quantitative easing down to $75 billion a month.

Fed officials anticipate slashing $10 billion off the central bank's bond purchases at each meeting this year, unless the economy shifts markedly. That pace would put an end to quantitative easing by year-end.

"I think the Fed is desperate to extract itself from quantitative easing, and it will continue to scale back the program and end it this year," Bernard Baumohl, chief global economist of the Economic Outlook Group, tells MarketWatch.

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