Nobel-winning economist Robert Shiller warns that history just might be on the brink of repeating itself because of investors of today haven’t learned anything from the lessons of the past.
Shiller, who helped develop the widely-followed S&P/Case-Shiller Home Price Indices, said he notices certain similarities in today’s housing sector to the run-up just before the Great Recession.
“Housing is driven by narratives. Before 2007, the narrative was flipping houses [and the belief that] home prices have always gone up,” the Yale economist told Yahoo Finance’s YFi PM.
“Then, after the Great Recession, it was tragic narratives about people who lost their home, or dangers of borrowing too much or lending too much," said Shiller, who was awarded the Nobel Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen in 2013.
"It’s been 10 years since the crisis. Now, those narratives are starting to be forgotten,” said Shiller, who 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.
The pace of home construction jumped 12.3% last month to reach its hottest clip since before the current expansion started, Yahoo Finance explained. That, coupled with a return on the part of Americans to look at housing more speculatively as an investment, has Shiller thinking, “we’re sneaking back into the old 2006 mentality.”
Earlier this month, Shiller said he “wouldn’t be at all surprised” if U.S. house prices soon started to decline.
The S&P CoreLogic Case-Shiller index of property values in 20 cities decelerated for a 15th month in June, increasing 2.1% from a year earlier. Shiller noted that adjusting for inflation, prices had already flattened.
“It would suggest declining home prices in the near future,” Shiller told Bloomberg Television. “I wouldn’t be at all surprised if house prices started falling.”
Meanwhile, the U.S. economy is outperforming expectations by the most this year, offering a fresh rebuttal to last month’s resurgent recession fears fueled by the trade war and a manufacturing slump.
The Bloomberg Economic Surprise Index has reached an 11-month high after four indicators released Thursday, including existing home sales and jobless claims, each surpassed expectations. The gauge continued to advance after swinging to positive from negative on Tuesday for the first time this year. The data also pushed a similar measure produced by Citigroup Inc. to the highest level since April 2018.
“It says things are getting better,” said Jim Paulsen, chief investment strategist at Leuthold Group in Minneapolis “There’s a definitive change in the growth profile and there’s an acceleration in growth. It’s interesting how pessimistic the attitudes still are among investors, yet when you look at surprise indexes, you would think people would feel better about growth. There’s a disconnect.”
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