Robert J. Schiller, a Nobel laureate and professor of economics at Yale University, appears to be deeply concerned about the housing market in the United States. In a recent publication, Professor Schiller warned that the United States is experiencing one of the largest boom houses in its history.
What concerns Professor Schiller is that a boom can not be forever. But when the boom is over, no one is right. Also, such a boom will end up again away from the safe. Will there be a gradual decline or catastrophic collapse in housing prices? Only time will show.
While one may be tempted to call for similarities with the great recession caused by housing just 10 years ago, diversity needs to be taken into account. House prices are rising sharply – that's true. But the other contributors to the last financial crisis – namely the increase in mortgage mortgages, the provision of debt obligations, the high domestic indebtedness and the speculative housing building, to name a few – are missing or not acute.
Will only inflation in household prices be sufficient to bring down the housing market?
Professor Schiller is revered for his deep insights on the markets. He foresaw the negative consequences of "irrational abundance," which he later wrote in a book of the same name. The S & P / Case-Shiller National Housing Index, bearing its name, shows its indelible mark on how housing markets are seen and understood.
He is also among several experts who in 2005 predicted the collapse of the housing market that contributed to the Great Recession in 2008-09. Ignoring the concerns of Professor Schiller is always unreasonable. At the same time, it is unreasonable to panic or start betting on the real estate markets in the fashion of your knees. A reasonable approach would be to determine if the US housing market is pervading economic grounds and, if so, whether the housing market is moving towards a soft landing or a precipitous fall.
According to the Case-Shiller index, current (nominal) housing prices in the United States are 53 percent higher than prices in September 2012, when they reached the bottom of the floor, an increase that was achieved partly even with an increase in interest rates. Current prices are also 11 percent higher than their peak in 2006.
Therefore, calls for concern seem to be justified.
But then there are differences between the current price escalation and the one seen in the mid-2000s. Housing prices are now rising at a slower rate than in 2005. During the six-year period, nominal housing prices in 2005 increased by more than 90 percent. Before the markets collapsed, housing prices rose by more than 14 percent annually.
By 2015, housing prices in the United States have increased to around five percent per year, which is at a much lower rate than in 2013, when annual price growth was more than 10 percent. The two- and three-year increase in current housing prices also seems to be stable from 2015.
Similarly, the rate of delinquency in residential mortgages with one family has been declining since it peaked in 2010, although the current delinquency rate remains higher than the levels before the Great Recession.
It also began annual adjusted annual housing in the United States, which reached more than two million in 2006, is currently well below 1.3 million units. Hence, the current response to housing to increase housing prices has been dampened. Any surplus on the supply of apartments, which could weaken the collapse in the real estate market, is not so pronounced now than before.
At the same time, household debt levels in the US are at the lowest level since the early 1980s. Professors Athif Mian of Princeton University and Amir Sufi of the University of Chicago explained how the huge increase in household debt before the Great Recession followed "a significant drop in household spending." Their research has shown that "excessive household debt leads to foreclosures" in the housing market.
Household debt levels in the United States are not as acute as they were in the fourth quarter of 2007, when debt payments to households as a percentage of the personalized disposable income reached a high 13 per cent. The same metric is on average at less than 10 percent since 2014.
For the US housing markets, 2019 will be an interesting year. Professor Schiller warns that housing prices can not grow forever. It can not be known for sure when prices are equal. However, the differences between the current economic bases and those that immediately preceded the Great Recession suggest that it is unlikely to be a catastrophic decline. Only time will show.
Murtaza Haider is an associate professor at Rierson University. Stephen Morris is a veteran in the real estate industry. They can be reached www.hmbulletin.com.