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Chip Case and Robert Shiller are known for the gauge of home prices that bears their name, but as that indicator continues to draw cheers for a U.S. housing recovery the pair warn that things are not quite as rosy as they appear.
The latest S&P/Case-Shiller reading showed that the 20-city average of prices was up 9.3% in February from the prior year, driving talk that the housing market is ready to be a driving force for the American economy once again.
Not necessarily so, warns Shiller, who says that while housing is normalizing, the uptrend in prices is not particularly big on a historical basis and underlying indicators of economic health are not overwhelming.
“There’s a lot of breathless commentary in the media right now,” Shiller told a small group of reporters at a breakfast Wednesday morning, and he just isn’t convinced that anything beyond a modest recovery is in the offing, even though he thinks there is sufficient momentum for the gains in prices to continue for the next 6-12 months.
Case admitted to being a bit more bullish at the event Wednesday, but was troubled by last week’s figures on new home construction, with housing starts slipping to an annualized rate of 853,000 in April. He called it a “terrible number,” after the prior month’s climb above 1 million starts.
US Housing Starts data by YCharts
There is a tailwind though, and despite “fragile” demand Case thinks the housing recovery is a tailwind, albeit not without reasons for worry.
David Blitzer, chairman of the S&P Dow Jones Indices index committee, proved to be something of a tiebreaker. He’s “mildly optimistic” that prices could rise another 5-10% over the next year. Housing is going back to some kind of normality, but normal isn’t rising 20% a year, he adds.
When the Fed finally lets interest rates go up “it will be a whole different ballgame,” Biltzer adds, but he doesn’t expect that to happen overnight, or even this year, and for the time being he’s more worried about the people getting loans. If anything restricts his bullishness it’s the difficulty many prospective buyers have securing a mortgage.
It’s partly because of what Bernanke called “excessive conservatism on the part of banks” during his congressional testimony Wednesday and what Blitzer calls “locking the barn after the horse [ran out].”
Between the lessons banks learned from the last bubble and the increased financial regulation aimed at preventing a repeat, financial institutions are exercising far more caution when it comes to doling out loans for real estate. That’s a real challenge for banks with big mortgage operations like
So while the average American may find it more difficult to buy a home, despite the current rate environment, deep pocketed buyers like Blackstone Group and other institutional investors have gobbled up home by the dozens, fixed them up and rented them out. While the big firms are likely lining their own pockets by doing so, Shiller says they are also doing a service by converting a chunk of the existing housing stock from (potentially underwater) owner-occupied to rental units.
The same trends help explain why the likes of
The wildcard in all this is what happens to the twin titans of the mortgage industry,
“I think there is a profound change coming,” says Shiller. “We don’t guarantee the stock market, but [through Fannie and Freddie] we’re guaranteeing 90% of the mortgage market.”
At some point that will change, and if the demand and ability of buyers isn’t yet able to make the housing finance business attractive to private capital when it does, the market could be facing its next great challenge.