Robert Shiller wins Nobel Prize in Economics

Yale Professor Robert Shiller has won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel:
Three American professors — Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller — were awarded the Nobel Memorial Prize in Economic Science on Monday for showing that asset prices move unpredictably in the short term but with greater predictability over longer periods. . . .

Mr. Fama, 74, was honored for showing that asset prices are “extremely hard to predict over short horizons.” . . .

Mr. Shiller, 67, would later introduce an important caveat to the idea that markets operate efficiently, finding that stock and bond prices show greater predictability over longer periods. Mr. Shiller and other economists see evidence that these movements cannot be entirely explained by rational decision-making, and instead reflect the irrational behavior of market participants.
Robert Shiller also co-developed the modern methods of tracking home prices used by this blog and my housing graphs website.

Why the prolonged economic slump? One word: Housing.

Economist Dean Baker writes about a recent research paper from the Federal Reserve Bank of Cleveland:
The study goes on to note the extraordinary weakness in housing in this recovery and point out that this weakness could explain much of the weakness of the recovery.

While the study notes that there are questions of causation (a weak recovery could lead to weakness in housing), there can be little doubt that if residential construction had returned to its pre-recession level, as had been the case by this point in all prior post-war recoveries, the economy would be back near full employment.

Of course it is not hard to understand why housing has not recovered. The massive over-building of housing during the bubble years lead to an enormous over-supply of housing, which shows up in the data as a record vacancy rate in the years 2006-10. In the last couple of years the vacancy rate has begun to decline which can explain the recent uptick in housing over the last few quarters.

This housing story explains why we should have expected a long and drawn out recovery. There is no easy way to replace the massive loss in demand associated with the collapse of the housing sector. And, it is hard to blame the collapse on President Obama, since the overbuilding took place in the years 2000-2006 and the collapse was already well underway at the point where he took office. ...

Ultimately we will need an increase in foreign demand, meaning a lower trade deficit, to fill the gap. This will require a lower valued dollar which will make U.S. goods more competitive internationally. Unfortunately, neither candidate seems willing to make the case for a lower valued dollar, which means that we can probably expect a weak economy for many years into the future, regardless of who gets elected.

Why the prolonged economic slump? One word: Housing.

Economist Dean Baker writes about a recent research paper from the Federal Reserve Bank of Cleveland:
The study goes on to note the extraordinary weakness in housing in this recovery and point out that this weakness could explain much of the weakness of the recovery.

While the study notes that there are questions of causation (a weak recovery could lead to weakness in housing), there can be little doubt that if residential construction had returned to its pre-recession level, as had been the case by this point in all prior post-war recoveries, the economy would be back near full employment.

Of course it is not hard to understand why housing has not recovered. The massive over-building of housing during the bubble years lead to an enormous over-supply of housing, which shows up in the data as a record vacancy rate in the years 2006-10. In the last couple of years the vacancy rate has begun to decline which can explain the recent uptick in housing over the last few quarters.

This housing story explains why we should have expected a long and drawn out recovery. There is no easy way to replace the massive loss in demand associated with the collapse of the housing sector. And, it is hard to blame the collapse on President Obama, since the overbuilding took place in the years 2000-2006 and the collapse was already well underway at the point where he took office. ...

Ultimately we will need an increase in foreign demand, meaning a lower trade deficit, to fill the gap. This will require a lower valued dollar which will make U.S. goods more competitive internationally. Unfortunately, neither candidate seems willing to make the case for a lower valued dollar, which means that we can probably expect a weak economy for many years into the future, regardless of who gets elected.

S&P/Case-Shiller national home price index falls again

In the first quarter of 2012, the S&P/Case-Shiller national home price index fell 1.9% year-over-year:
Data through March 2012, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that all three headline composites ended the first quarter of 2012 at new post-crisis lows. The national composite fell by 2.0% in the first quarter of 2012 and was down 1.9% versus the first quarter of 2011. The 10- and 20-City Composites posted respective annual returns of -2.8% and -2.6% in March 2012. Month-over-month, their changes were minimal; average home prices in the 10-City Composite fell by 0.1% compared to February and the 20-City remained basically unchanged in March over February. However, with these latest data, all three composites still posted their lowest levels since the housing crisis began in mid-2006. ...

The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, posted a 1.9% decline in the first quarter of 2012 over the first quarter of 2011.
Unfortunately, crappy journalists at several different news organizations keep emphasizing the 20-city numbers instead of the national numbers. Why? Why would anyone think that an index that measures a random selection of 20 cities deserves more emphasis than an index that covers the overall country? (Note: The S&P/Case-Shiller national home price index really only measures 70% of the country, but that's still way more than just 20 cities.)

S&P/Case-Shiller national home price index falls again

In the first quarter of 2012, the S&P/Case-Shiller national home price index fell 1.9% year-over-year:
Data through March 2012, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that all three headline composites ended the first quarter of 2012 at new post-crisis lows. The national composite fell by 2.0% in the first quarter of 2012 and was down 1.9% versus the first quarter of 2011. The 10- and 20-City Composites posted respective annual returns of -2.8% and -2.6% in March 2012. Month-over-month, their changes were minimal; average home prices in the 10-City Composite fell by 0.1% compared to February and the 20-City remained basically unchanged in March over February. However, with these latest data, all three composites still posted their lowest levels since the housing crisis began in mid-2006. ...

The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, posted a 1.9% decline in the first quarter of 2012 over the first quarter of 2011.
Unfortunately, crappy journalists at several different news organizations keep emphasizing the 20-city numbers instead of the national numbers. Why? Why would anyone think that an index that measures a random selection of 20 cities deserves more emphasis than an index that covers the overall country? (Note: The S&P/Case-Shiller national home price index really only measures 70% of the country, but that's still way more than just 20 cities.)

Housing recovery a long way off

In a CNBC editorial, Michael Yoshikami argues that a housing market recovery is still a long way away:
Housing starts were surprisingly strong this week, while there was improving sentiment from home builders. So should we start to breathe a sigh of relief that the housing market is returning to health? The short answer is no. The headlines say that housing is stabilizing and there are signs of life in the real estate sector. This is true but is only part of the story. Signs of life is far different than a return to healthier times.

While KB Homes and Toll Brothers are reporting sales increases, this does not erase the fundamental problem with the real estate market today; there are too many people wanting to sell and not enough buyers. In some neighborhoods in the United States, every other house is for sale and sitting stagnant with no takers. But this is the obvious sign that the real estate market is troubled; there are deeper problems below the surface.

What is more troubling is in every block in neighborhoods across the United States, there are huge numbers of potential sellers that would sell their house if they could get the price they believe their house is worth. This huge reserve of sellers creates a supply waiting to flood the market when any sign of recovery in real estate capital values returns.

Additionally, banks continue to hold huge inventories of foreclosed properties waiting for a rebound in the market before placing these properties into the real estate market. ...

In addition to supply issues, the U.S. economy is far from healthy. While we are in the midst of an uneven recovery, unemployment remains stubbornly high and the prospects of a more normalized employment rate are far off in the distance.

Housing recovery a long way off

In a CNBC editorial, Michael Yoshikami argues that a housing market recovery is still a long way away:
Housing starts were surprisingly strong this week, while there was improving sentiment from home builders. So should we start to breathe a sigh of relief that the housing market is returning to health? The short answer is no. The headlines say that housing is stabilizing and there are signs of life in the real estate sector. This is true but is only part of the story. Signs of life is far different than a return to healthier times.

While KB Homes and Toll Brothers are reporting sales increases, this does not erase the fundamental problem with the real estate market today; there are too many people wanting to sell and not enough buyers. In some neighborhoods in the United States, every other house is for sale and sitting stagnant with no takers. But this is the obvious sign that the real estate market is troubled; there are deeper problems below the surface.

What is more troubling is in every block in neighborhoods across the United States, there are huge numbers of potential sellers that would sell their house if they could get the price they believe their house is worth. This huge reserve of sellers creates a supply waiting to flood the market when any sign of recovery in real estate capital values returns.

Additionally, banks continue to hold huge inventories of foreclosed properties waiting for a rebound in the market before placing these properties into the real estate market. ...

In addition to supply issues, the U.S. economy is far from healthy. While we are in the midst of an uneven recovery, unemployment remains stubbornly high and the prospects of a more normalized employment rate are far off in the distance.

Why did America’s housing bubble decline more than in other countries?

Much of the developed world (especially America and Europe) had a housing bubble. The Economist asks why America's fell so much faster than the bubbles in Europe:
Perhaps the difference is institutional. American banks had poorer lending standards and have been quicker to foreclose on properties; borrowers have been readier to walk away from their homes. In European countries, owners have been able to sit tight in the hope that prices will recover. European markets are certainly a lot less liquid. Irish transaction volumes dropped by 83% from their peak and Spanish ones by 64%, but American deals fell by just 46%. Europe is going in the same direction as America. It is just getting there more slowly.

Why did America’s housing bubble decline more than in other countries?

Much of the developed world (especially America and Europe) had a housing bubble. The Economist asks why America's fell so much faster than the bubbles in Europe:
Perhaps the difference is institutional. American banks had poorer lending standards and have been quicker to foreclose on properties; borrowers have been readier to walk away from their homes. In European countries, owners have been able to sit tight in the hope that prices will recover. European markets are certainly a lot less liquid. Irish transaction volumes dropped by 83% from their peak and Spanish ones by 64%, but American deals fell by just 46%. Europe is going in the same direction as America. It is just getting there more slowly.
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