1.27.10
Walking by the TV this morning I caught the tale end of a Bloomberg interview with Robert Shiller – one half of the well-known Case-Shiller Home Price index. When asked near the tail end of the interview about US housing prices, he mentioned that he had just been in San Francisco and due to the extraordinary price gains in the market (16% YoY growth) he said he might have “smelled a bubble.”
[See latest Case-Shiller results HERE]
I’m not sure if developing a home price index qualifies someone to “smell” bubbles and it is true that after two successive real bubbles: the Nasdaq (peaking in 2000) and home prices in most of the US (particularly in major cities peaking in 2005-2006), many people are getting on TV claiming to see bubbles everywhere. Typically bubbles aren’t that obvious to most people so if many people see it, it is likely not a bubble, at least not yet. For example, what is most likely a bubble, one which many might see but are not prepared for (to me, the same thing as not seeing it – if you see a rock flying at you, you would duck wouldn’t you?), is the US government debt market. Jim Rogers put it best – Would you lend your money to the US government for 30 years for 4 or 5%? Most people say no – because inflation of the money supply, weakness in our currency, and/or a rising interest rate market would make that investment a loser. BUT many institutions – pensions, endowments, etc, and many foreign countries still buy our bonds (to be fair mostly shorter term bonds) despite the fact that many buyers know they are playing with fire. They’re not ducking!
Bottom line – I am not sure if Robert Shiller can sniff bubbles out, but he does focus his research and work on this topic. He also tempers his comments which to me is often the sign of a thinker (as opposed to many who come on financial TV and scream and spout ridiculous comments). His words of caution on the SF housing market should be considered thoughtfully.
On a further note, if the Fed follows through on their idea to stop buying mortgage bonds – thereby allowing market interest rates to rise – we might see more expensive borrowing rates and that is never good for real estate (see story HERE), though I will have to see this to believe it.
