SHILLER: ‘We’re Living In A Totally Artificial Real Estate Economy’; Shiller thinks a full housing recovery is a long way off. He thinks it could take 40 years before home prices rise to pre-2007 levels

SHILLER: ‘We’re Living In A Totally Artificial Real Estate Economy’

Drew SandholmCNBC | Mar. 26, 2013, 7:51 PM | 11,479 | 27

Housing data released Tuesday was mixed, showing home prices jumped while new home sales dropped, prompting renowned economist Robert Shiller to call the housing recovery positive in the short-term, but not without many headwinds. There might even be a bubble, he said.

“One thing that makes it very hard to forecast home prices right now is that we’re living in a totally artificial real estate economy,” said Shiller, co-creator of the Standard & Poor’s/Case-Shiller Index, a widely followed measure of housing prices.

Shiller pointed to the Federal Reserve, which last week reaffirmed its policies on bond purchases and record-low interest rates. In September, the Fed launched a third round of quantitative easing (QE), in which it has bought $40 billion of mortgage-backed securities per month, primarily in mortgage-backed bonds.

Meanwhile, Fannie Mae and Freddie Mac, the two largest U.S. home funding sources, remain in government conservatorship as Congress looks for ways to raise new tax revenues, Shiller noted.

“All of these things are weighing on the futures of housing,” Shiller said on CNBC‘s “Futures Now,” adding the recovery might even be a bubble. “One thing you learn from history is that bubbles can occur at any time.”

The Case-Shiller Index on Tuesday soared 8.1 percent compared to a year ago, kicking off the year with the biggest year-over-year increase since 2006. Home prices in the 20 major U.S. cities tracked by the index gained 1 percent in January versus the month prior, topping estimates for a gain of 0.9 percent.

To Shiller, the Phoenix and Las Vegas housing markets have grown incredibly fast, suggesting the recovery might be a little frothy. Both markets joined the housing bubble in 2004, he noted, only to later crash by 50 percent. Today, home prices in both cities are rising “with some exuberance,” which troubles Shiller.

Nevertheless, Shiller thinks a full housing recovery is a long way off. He thinks it could take 40 years before home prices rise to pre-2007 levels.

David Blitzer, chairman of the S&P 500 Index Committee, took a more bullish view on the housing recovery.

“We seem to be cranking at all cylinders,” said Blitzer, adding the rise in home prices is “clearly buoyant” thanks to improved economic data, such as a 5.7 percent rise in durable goods orders in February as demand for transportation equipment rebounded. Economists polled by Reuters had expected orders to rise 3.8 percent after a 4.9 percent decline in January.

(Read More: February US Durables Soar, Bolstered by Transportation)

Blitzer acknowledged that real estate investors are driving some sales, but contested a “The Wall Street Journal” article on Monday that reported that cash buyers, largely investors, make up about 32 percent of sales nationally.

“That sounds very high, except for maybe in one or two spots,” Blitzer said on CNBC’s “Squawk on the Street.” “But this clearly is picking up the market. It’s probably pulling a lot of houses that are under water or in some state of foreclosure off the market or helping renovate them to help the neighborhoods look better. So all of that is a plus.”

Lending to Shiller’s skepticism, though, new home sales declined 4.6 percent in February to a seasonally adjusted annual rate of 411,000 units, according to the Commerce Department, missing estimates for a reading of 422,000. Last month’s decline followed a 13.1 percent jump in January.

(Read More: US New Home Sales Drop as Prices Rise)

From the pits of the New York Mercantile Exchange, professional trader Anthony Grisanti expressed optimism over housing. In turn, he plans to buy the E-mini S&P futures contract for June at $1,550 with a stop of $1,531 and a target of $1,585, which is just shy of its high at $1,586.

From a technical standpoint, pro trader Rich Ilczyszyn likes Grisanti’s trade, but worries institutional traders will likely shore up their positions ahead of the long holiday weekend. Instead of buying the E-mini at current levels, he suggests waiting for a correction.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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