Jan. 21, 2022
by Robert Huebscher,
Following a year of record increases, Robert Shiller expects housing prices to level off over the next two years. But, he said, there could be declines.
Shiller is a professor of finance at Yale University. He spoke via a conference call hosted by Barclay’s Investors for its RIA clients. The talk was focused on the economic forecast for 2022.
Based on the CoreLogic Case Shiller price index, single-family home prices increased 19.7% in the last year (17% in real terms), which Shiller said was a record. “It is interesting that this happened during the pandemic,” he said.
Home prices are more “inertial” than other prices, Shiller said. He helped establish a futures market for housing and said that quotes on it are flat, meaning that no increases are expected over the next couple of years.
“It is plausible that the boom will diminish,” he said. But housing prices have risen relative to construction prices so the demand for existing homes will likely go down. If that doesn’t bring prices down, supply will increase and decrease prices.
“The outlook for home prices is not as positive as many think,” Shiller said.
There have been periods of hyper- and moderate inflation of home prices, but home prices do not go up forever. “There is risk in housing people are not aware of,” Shiller said. But he also said the economy is hard to forecast because of its uniqueness.
Indeed, he described the economy and markets as “extremely unusual” – high prices in all three major asset classes: stocks, bonds and real estate. “Rarely are all three this high together,” he said and added that it is valid to point to monetary policy as the cause.
Consistent with the theme of his recently published book, Narrative Economics, he said the economy is driven by an “epidemic” of narratives. “That has been going on for some time,” he said, “and we are stuck with that.” It is driven, in part, by teenagers investing through Robinhood.
“It is like the 1920s,” he said, “and this is the second roaring 20s.”
Shiller said he has not yet put out a crash call, “but it is a possibility.” His expected return for stocks is positive and higher than the Treasury bond yield, but he did not say over what timeframe that applied.
There are advantages that emerged from the pandemic, he said, such as the possibility of working from home. “We have discovered that it is okay to have a child in your lap for a Zoom call,” he said.
We are learning we can do things differently. That is a huge productivity gain that won’t show up in the GDP. One of those benefits, according to Shiller, is that we won’t use cars as much if we don’t have to commute.
He described the growing role of China in the global economy as a “blessing for all of us,” because it brings cheap manufactured goods and “delights” like TikTok. He does not expect China to attack Taiwan.
Shiller discussed why environmental, social and governance (ESG) investing has become so popular.
He called it a “gentler” form of philanthropy and noted that the concept of charity goes back thousands of years. He said ESG is more focused on real problems than faith-based investing. “It has an urgent feeling to it,” he said.
The term ESG has been growing exponentially since it was first mentioned in 2004. “It is like an epidemic disease,” he said, “but a welcome one.” It responds to the concerns we have about fires, flooding and the possibility that entire countries will be in trouble and there is nothing that can be done about it.
“I think it will last a long time and will have a good effect on the market,” he said, “raising the cost of capital for anti-social companies. It may be contagious.”
He likes stocks with low CAPE ratios and high (“green”) ESG ratings to avoid the phenomenon of prices being bid up by the ESG phenomenon.
ESG investing has done well, Shiller said, although investors may lose some return in the future. The net effect is to push prices up, but people will still hold those stocks.
Global warming could get worse, he said, for example from events like wildfires that create more consternation. That possibility has been going on for a long time and combines with ESG. “A lot of people are really worried about global warming,” he said, “and it is a bigger issue long term than COVID.”
The risks in the economy also include an atmosphere of mistrust and polarization in the U.S. and elsewhere such as between conservatives and liberals, and Democrats and Republicans. "It has gotten very strong and is built on the assumption the other side is lying,” Shiller said.
Robert Huebscher is the founder and CEO of Advisor Perspectives.
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