Bubble, bubble, housing market's in trouble, author warns
By Lyn Millner, Special for USA TODAY
In March 2000, when our stocks and our sensibilities were tripping through the stratosphere, Yale economist Robert J. Shiller tried to yank us down to Earth. His first edition of Irrational Exuberance pointed to a bubble in the stock market.
Some of us covered our ears with our hands and sang "la-la-la-la-la." Others pooh-poohed him outright. Then the market headed south. And it didn't rebound.
Irrational Exuberance, Second Edition, by Robert J. Shiller; Princeton University Press, 304 pages, $28.
And Shiller went from being Chicken Little to Paul Revere.
His book was a best seller.
Now, Shiller has seen fit to update Irrational Exuberance. In this new edition, he warns that there's a bubble in home values. We haven't lost the irrational exuberance Greenspan chided us for in 1996, he writes. We've redirected much of it to real estate.
Did someone say "real estate"? Oh, can we please talk about real estate? Because we are obsessed with it. Home values are skyrocketing, people are profiting mightily and all of us are yammering with everyone (friends, neighbors, strangers, kindergartners), everywhere (cocktail parties, elevators, gyms, Jiffy Lube waiting rooms). Just as stocks were in the '90s, real estate is the public conversation. We are ravenous for more information.
And we are irrational. That's what causes bubbles, Shiller points out. Our irrationality is fed and amplified by optimistic forecasts from analysts, by the media, by the perceived effects of the baby boom and the rise of an ownership society. We rationalize the boom with new-era thinking and the theory of efficient markets.
Shiller covered all of this in the first edition. In fact, the lion's share (bear's share?) of this edition is lifted straight from the first. There's the added chapter on real estate, and some updated examples from the stock market.
Why a whole new edition? Why didn't Shiller pen some magazine articles instead, discussing the dangers of real estate speculation? Because we're listening — perhaps even more than we did in 2000 — and he knows it. And this edition feeds our howling appetite for all things real estate.
So. On to the juicy chapter, which opens with a chart of U.S. home prices from 1890 to present. Beginning in 1998, the line shoots skyward. Cue the dirge music.
When it comes to real estate, Shiller writes, we cling to the myth that home prices always rise. It's not true. Shiller shows that, since 1890, real home prices have been flat or declining.
The only dramatic increases are confined to two brief periods — right after World War II and the current one. The World War II boom was caused by actual demand and a corresponding shortage of housing to fill that demand. Today's boom is driven by speculation.
Before you cover your ears and start singing, consider Shiller's cogent arguments. Could the run-up in home values be the result of rising construction costs? Nope. Charts show that these two increases are vastly disproportionate.
What about the population surge that has created a land shortage? Shiller's charts show that population growth in the USA has been steady. And, he adds, "We didn't just run out of land since the late 1990s."
Speculation is what is driving prices upward. And it's "more entrenched on a national or international scale now than ever before."
Real estate prices are rising much more rapidly than incomes. People are stretching themselves thin to pay their mortgages, many of which have adjustable interest rates. And rates are headed up.
When will the bubble burst? Shiller is too smart to try to predict that. And how bad could it be? Pretty bad. It might set off a worldwide recession. That scenario is "not inevitable, but it is a much more serious risk than is widely acknowledged."
What should we do? Shiller has a few suggestions.
Mortgage lenders should tighten their standards to prevent individuals from borrowing beyond their means. Investors should increase their savings and diversify into bonds. (Stocks are still overvalued, he argues, compellingly enough that even the most bullish readers may shift some money into bonds.)
Shiller also presents a recommendation for Social Security reform, and he argues that monetary policy and opinion leaders can and should act as stabilizing forces.
The big problem with this book is the writing. It is snooze-inducing. Shiller's topic — the volatility of markets — is dangerous. But his book conveys none of the suspense. And that's not good, considering that it will be on lots of nightstands. Reading it may help many people, but not in the way Shiller intends. Someone as bright as he is has a responsibility to make his expertise more accessible.
The first edition of this book was widely read because of its timing.
This one, too, seems perfectly timed, coming when we're starting to fear we've been fooling ourselves. Again.
"There are times when an audience is receptive to optimistic statements and times when it is not," Shiller writes. And he seems to know that our tolerance for optimism is low.
Who should read this book? Anyone who didn't read it the first time, including fund and endowment managers, lenders and individual investors.
There's a world of important information for everyone. |
