Nobel Prize-winning Yale economist Robert Shiller warns that the weakening housing market is showing the same symptoms as it did just before the subprime housing bubble burst a decade ago.
The economist, who predicted the 2007-2008 crisis, recently told Yahoo Finance that current data reflects “a sign of weakness.”
“The housing market does have a momentum component and we’re seeing a clipping of momentum at this time,” said Shiller, the co-founder of the Case-Shiller Index, which tracks home prices around the nation.
Shiller spoke just after U.S. home price gains slowed for the fifth straight month in August as higher mortgage rates have lowered home sales. The S&P CoreLogic Case-Shiller 20-city home price index, released last week, increased 5.5 percent in August compared with a year earlier, down from a 5.9 percent gain in the previous month.
“If the markets go down, it could bring on another recession. The housing market has been an important element of economic activity. If people start to get pessimistic about housing and pull back and don’t want to buy, there will be a drop in construction jobs and that could be a seed for another recession,” said Shiller.
“By the way, we’re overdue for another recession,” said Shiller, who was awarded the Nobel Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen in 2013.
“The drop in home prices in the financial crisis was the most severe drop in the U.S. market since my data begin in 1890,” Shiller said.
“It could be that we’re primed to repeat it because it’s in our memory and we’re thinking about it but still I wouldn’t expect something as severe as the Great Financial Crisis coming on right now. There could be a significant correction or bear market, but I’m waiting and seeing now.”
Shiller also developed the cyclically adjusted price-earnings (CAPE) ratio market valuation measure, which is calculated using price divided by the index's average historical 10-year earnings, adjusted for inflation.
However, not everyone is as pessimistic as Shiller.
To be sure, Forbes.com Contributor Bill Conerly doesn't see a looming housing bubble.
"The tool that helped me identify the last bubble—measuring new construction relative to population growth—helps me now say we are not overbuilding," Conerly recently explained on Forbes.com.
"I expect small declines in new housing construction in the coming years, but no bust. We have not built so much housing that the price has to fall. In fact, it’s most likely to rise a little faster than it’s historical average rate of 4.6% annually, but less than the recent 6.5% rate," he predicted.
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