Are we setting ourselves up for another bubble?

Question

Robert Shiller thinks we may be doing just that.

US Housing Market Could Be Facing Another Bubble: Shiller

The housing market, which already has been battered by the worst collapse since the Great Depression, could be setting itself for another bubble, well-known economist Robert Shiller told CNBC.

With home affordability at a 40-year high, there is "absolutley" a possibility that the housing market will face another bubble in the next five years, said Shiller, an economics professor at Yale, co-founder of MacroMarkets and co-developer of the monthly Case-Shiller home price index.

"The low interest rates, the affordability is leaning that way and the ratios are back down," Shiller said in a live interview. "I get glimmers of excitement among some people, but we still have a high inventory of unsold homes, and we still have a lot of weariness because of the recent experience."

Although the most recent Case-Shiller report showed that US home prices posted their first monthly increase in almost three years, the sectorâ€”and the economyâ€”are still a long way from recovery, Shiller said. Another round of stimulus money and revival of the credit markets is the only way the economy will shake out of this rough patch, Shiller said.

"It's clearly not over yet," he said. "It's not obvious that people are really ready to spend again. That may take years to rekindle that normalcy."

With the exception of a government-injected stimulus, the Great Depression draws a strong corollary to today's market, and Shiller fears it will struggle through a similarly slow recovery, he said. Though the stock market doubled in 1933 and rallied for about four years, unemployment numbers continued to sag and the economy didn't return to prosperity.

"That's what I worry could happen," Shiller said. "We'll have a recovery and it will be exceptionally weak for years to come."

http://www.cnbc.com/id/32474763

Jeff Tumbarello · Answer

We are a bubble based economy, the rabbit is chased from one bubble to the next.

The money appears to flowing from the stock market.

If true, the trend indicators say the stock market is running out of steam, period.  Late-trends show this clearly, with less Money In Motion playing the game as each day passes.

Where's the AWOL money?  I don't have the faintest idea, but the last two times it left the market, it found a chunk of Real Estate and a long-term Bank instrument of some sort or other long before it went back to the slaughterhouse on Wall Street.

email for some charts on this. in exchange for sharing the reserach, please share all feedback and thoughts

Timothy W. · Answer

I've come to the perspective that bubbles and bursts amongst numerous sectors are just going to be a regular part of our economy, at least for our lifetime.

The mass of people have moved from producers to consumers.  People will spend 100k and eight years of their life on a degree and never spend 1 week and $50 learning how to plant food that the earth will grow for you for free.  They are slaves to the cycles of buying and selling and by placing their personal value on the marketability of their skills - have converted their self worth to a commodity.  Any commodity trader worth their salt never owns 100% in one commodity because it's a fact of life that one will go up while another is going down.

We've seen this before.  We saw it at the dawn of the Industrial age when people were moving from farms to factories and becoming consumers rather than producers.  What we're doing now is rapidly speeding up the effects of this shift in perspectives.  We know the model to follow to profit from this because it was done before.

Craig Grella · Answer

Everyday i review valuations on properties for banks and servicing companies, specifically those that have already been taken back by the bank and are just sitting on their balance sheets.  There are thousands of these properties across the country in virtually every market from wall street to main street.

These properties have not yet been assigned to brokers for re-entry onto the market, which may spell danger for, or at the very least slow down, any future recovery in our housing market.

I'm not sure how that all related to any bubble we may have seen recently, but before the markets can truly recover, we need to see some price stabilization and normalcy throughout the lending institutions.

I think the latter has already begun, as evidenced by quarterly profits of some of the major banks in the US.

Steve C. · Answer

It ain't over yet and we haven't even hit bottom...  Best beware of those long term holds guys...

Jim Wineinger · Answer

I think the "bubble" may just be that housing tax credit. This is inducing some to pay more for certain homes than they would otherwise do. That along with the competition of the investors to get those same homes is driving up the housing costs causing some to say that we are in a slow recovery.

When this "bubble" ends more investors may step in, but the housing prices will again tend to fall somewhat and thus keep up in the recession longer than the current thinking is.

Get the government out and let the free market do its work so we can return to normal.

Alan Barker · Answer

When the $8,000 First Time Buyer Tax Credit ends we're going to see a huge slow down in real estate sales. We're addicted to ridiculously low interest rates and government assistance.

Chuck Robertson · Answer

OK. I apparently didn't read the formatting instructions correctly.

I'll get it right next time.

Chuck Robertson · Answer

To know if we are going to see another bubble, we need to understand the causes of the last bubble.  Dr. Thomas Sowell has authored one of the first look-backs at the previous bubble called (i)The Housing Boom and Bust(/i).  I heard him interviewed about it and he seems to have a good grasp of all the factors that contributed to our problems.

I have not yet received my copy, but having read some of his other works, I can strongly recommend him as an author who knows economics.  This is not an ad for his book.  I just think that the truth needs to get out there instead of all the finger pointing by politicians, who confounded the problem, but want to stay in office.

I'm interested to hear if anyone has read it yet or has some other suggestions for books, articles, web-sites or blogs.

Happy investing!!!

Paul H. · Answer

I'm actually in the process of closing on a home that was a real bear to get to underwriting.

Mortgage companies are very strict right now.

Its one thing to write a article about speculation - its another thing entirely to be on the receiving end of scrutinized FHA purchases.

IMO - watch your market, pay attention to the inventory.  There's a bubble bursting, but it's because there's a new wave of sub-prime loans coming due.

I put little stock in article writers that need filler space to make their print run quota.

Are we setting ourselves up for another bubble?

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