Remember, it was Yale prof. Robert Shiller who was the original source of the term “irrational exuberance” and not, as everyone thinks, Mr. Greenspan (see here). His opinions are worth a listen as he nailed the top in both the stock market and housing bubble.
We tend to agree with him on the current state of the U.S. housing market as he lays out in the video below.
How far can housing go from here? Not sure, but, given we don’t see a return to the 2004-07 credit bubble — i.e., Alt-A, no doc mortgages, etc. — or a big spike in wage growth and hyperinflation, we’re not as lathered up as markets seem to be.
Here are our thoughts:
1) Housing is bouncing off its crash lows and will eventually settle into a sustainable long-term trajectory;
2) The current housing cycle is ass backwards as it usually bottoms when rates are peaking. Rates have nowhere to go but up from here and will eventually put pressure the long term recovery;
3) Mortgage loans are still tight partially due to repressed interest rates which have created a disequilibrium and shortage of credit similar to what rental control does;
4) The Federal government is the predominant, or almost only end supplier of mortgages;
5) Long term housing prices track wage growth and eventually will mean revert when out of alignment;
6) Hedge funds and private equity are buying and pressuring the supply of lower priced single family homes. Given the current political environment raising rents may some day become a political issue;
7) The real strength in the housing market has been in multi-family as the preference not to own has increased. Are younger millennials really into McMansions in the suburbs? Doubt it. Though it’s probably too early to conclude a structural shift in preferences is underway, but it is certainly not priced, much less discussed.
Now listen to the good professor.
(click here if video is not observable)