Wednesday, June 15, 2011

Why Buy A Home Now If Prices Are Going to Continue to Fall?

Robert Shiller had a good article last weekend in the New York Times about the role that future price expectations might have on overall economic activity, particularly as it relates to housing.

Shiller, of course, is the Yale professor who famously wrote the book Irrational Exuberance in 2000, which correctly forecast the popping of the technology stock bubble.

He then turned his attention to the housing market, and together with Karl Case of Wellesley College came up with the Case-Shiller index of housing prices that is now widely followed.

Shiller has also been prescient about the future course of housing a few years ago, and even wrote a bearish chapter on housing in one of subsequent editions of Irrational Exuberance.

Dr. Shiller was in the news last week with the forecast that housing prices could decline -25% from current levels.

He subsequently backpedaled somewhat on this forecast - noting that predicting the trend of housing prices was like trying to predict the weather - but I think the point remains that he is more bearish on housing than most economists.

That said, many surveys of people actually involved in the business of building and selling houses are more in line with Professor Shiller.

For example, Diana Olick of CNBC posted a tweet on Twitter that indicated that a recent survey of home builder sentiment reached lows not seen since February 2009.

The problem is largely expectations rather than fundamentals. Low mortgage rates and falling house prices has driven affordability of buying a new home to levels where, on a purely financial basis, it makes more sense to buy than rent.

Yet no one wants to buy and watch the value of their new home drop by another 10% or 20%. Or, put another way, the expectation of lower future home prices has become a major impediment to any improvement in housing.

This is the point that Shiller made last Sunday:

Even for people who have other reasons to buy a house, there may be little urgency to do so. Our 2011 survey found that the median expectation for home price appreciation next year is just 1 percent. So it won’t be surprising if new home sales remain abysmally low and few jobs are created in the hard-hit construction industry. And it shouldn’t be a shock if the personal savings rate stays at around 5 percent, as it has recently, up from around 1 percent in 2005. This would mean that consumer spending will not drive a strong recovery.

The Sickness Beneath the Slump - Economic View -

Hopefully he is wrong in his bearish sentiment, but given his track record it's hard to bet against Robert Shiller.