Yale Professor Predicts Housing 'Bubble' Will Burst
MADELEINE BRAND, host:
This is DAY TO DAY. I'm Madeleine Brand.
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But, first, here in the United States we've been hearing the whispers for a while: The real estate market is a bubble about to burst. But somehow it hasn't. The market has remained hot. Thirty-year mortgage rates dipped again this week. Sales of existing homes set a new record last month. And here to help sort it all out is Yale economics Professor Robert Shiller. He's the author of "Irrational Exuberance." It's a book about the dot-com bust.
And, Professor Shiller, you were quite prescient about that bust. What do you say about real estate?
Professor ROBERT SHILLER (Economics Professor, Yale University): Well, I don't think I'll time things quite as well this time. It's very hard to predict the exact turning point. I'm making the assumption that it is going to turn, but, you know, it kind of has to do something different. The market has been going up at a faster rate each year for the last eight years. So we're building up to something, and I'm just wondering when it will change.
BRAND: You made the argument in The Wall Street Journal yesterday that it's basically about talk, and you say that there is a volume of public talk right now that is set to cause the bubble to burst. What do you mean by that?
Prof. SHILLER: Well, I didn't express any assurance that it would make the bubble burst. It might have the opposite effect of strengthening it. That's what it has been doing. But I think that the nature of the talk may be subtly changing. I mean, people are--seem to be much more aware of the possibility that we're in a bubble now and that that--whether they call it a bubble or something else, lots of people are expressing awareness that something is funny here. There's so many people talking excitedly about buying real estate because the prices are going up. And, hey, that's why the prices are going up, because so many people are excited.
BRAND: Why can't we predict the ups and downs of the real estate markets simply by comparing income to housing prices? For example, you look at the average personal income of a real estate investor, you look at the average price of a house and say whether or not that person can afford to buy it or not. Why can't that predict whether or not there'll be a burst?
Prof. SHILLER: You're absolutely right. Right now price relative to rent, price relative to construction cost, price relative to income--those are all at high or record levels, and people are starting to become aware of that. And that's the change that will eventually end this bubble.
BRAND: Of course, there are crucial differences between real estate and stocks. You know, stock worth can just evaporate on paper. It's hard to have a house evaporate. And I think people probably look to housing as a more secure investment in that sense; that it's actually a physical entity that they can literally lay their hands on. So is that also a difference in how you can predict a bubble?
Prof. SHILLER: The value of houses changes a lot--the market value. And it's worthwhile to reflect that although home prices have gone up a lot in the recent years, they are just the same houses, right? There's no change in the services they provide. It's just the value we put on them. And so a house's value can just evaporate overnight, too. If people suddenly get very wary of investing in houses because they don't think the prices are going to go up or if they think they're going to fall, than that will cause home prices to fall.
BRAND: And there are different categories of real estate. There's commercial real estate. There are primary homes, secondary homes. Would they all be affected the same way?
Prof. SHILLER: Of course, there's differences, and there's also regional differences, which are extremely important. Certain regions have been very volatile; others have been very stable. And I expect the stable regions to stay stable. But there is some tendency--you know, there's a common statement that--Alan Greenspan said, `We've had a lot of local bubbles, that we don't have a national bubble.' Well, OK. I mean, maybe he's technically right. The enthusiasm is infectious, and it's starting to spread all over the place. And it's--even in some places that you'd think are very stable, it's starting to pick up.
BRAND: And, Professor Shiller, are you in the market?
Prof. SHILLER: Well, I have my house and I have a summer house that I bought three years ago. I'm not in the market to buy more now. I don't want to sell them, but that's why--you know, most of us have to live somewhere, in a house, and we're not going to buy and sell our primary residence just because of trying to time the market. I think that one could conceivably buy a house to try to flip it in a year, and, yeah, there's a good chance that prices will be a lot higher in a year, but I wouldn't be too sure. I think it's getting risky.
BRAND: Robert Shiller is a professor of economics at Yale University. He's the author of the book "Irrational Exuberance." And he joined us from Yale.
Thank you very much.
Prof. SHILLER: OK, a pleasure.
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