ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
More good news from the U.S. housing market Tuesday – an 9.3-per-cent price increase in the 20-city S&P Case-Shiller home price index – is bound to boost confidence in many quarters about the country's economy. But one person isn't nearly so optimistic – one of the two academics behind the study, Yale University Economics professor Robert Shiller.
Speaking Tuesday to The Daily Ticker, Mr. Shiller was asked if the latest news was an indication of a return to good times or the makings of another bubble created by free money that would come crashing down. "Nobody knows, but my guess is the latter sounds closer," Mr. Shiller replied.
"We are in such an abnormal economy" in which the U.S. Federal reserve is buying $40-billion U.S. per month in mortgage securities, and a 2.61-per-cent rate on a 15-year mortgage " is just barely above the target inflation rate. They're not going to keep it that low forever. So right now there's a lot of excitement in the housing market but I think it might be just short term … My guess is 10 years from now home prices will be about where they are now in real terms."
There is reason to believe the housing upturn has room to run: BMO senior economist Sal Gautieri points out that the Case-Shiller index is still a full 28 per cent down from the April, 2006, peak. Meanwhile U.S. households, unlike those in Canada, have steadily deleveraged since the onset of the financial crisis, and inventories of home for sale and new homes remain at multi-year lows.
"We do expect a healthy increase over and above inflation" in home prices for some time to come, Mr. Guatieri said. "There's a lot of potential for U.S. house prices to rise faster than inflation and increase just to restore fair value. We're in the early days of a recovery of prices."
But first-time buyers are notably absent, while most of the recovery in housing prices is likely past, Gluskin Shefff chief economist David Rosenberg said last week. Renters account for the increase in households, while hedge funds and institutional investors have been buying much of the housing stock, according to reports.
Meanwhile, a U.S. financial services congressional committee recently noted that private guarantors of mortgage bonds have all but vanished, with 90 per cent of residential mortgage originations now being securitized into government-backed bonds. "If the government keeps doing this, and markets aren't allowed to work, we'll be right back where we were in 2007 and 2008," former U.S. Treasury secretary Hank Paulson recently told Bloomberg News.
Don't be too optimistic about the supposed U.S. housing recovery just yet. More broad-based data is needed to propel the U.S. economy. Then we'll see just how well it can handle a tightening of the gushing monetary policy that has kept things stable up to now.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.