Word: shiller
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THESE ARE THE KINDS OF THOUGHTS THAT occupy Yale economist Robert Shiller, who with Karl Case of Wellesley has done more than anyone else to document the postmillennium real estate boom and warn about the inevitable bust. Shiller first made his name in the early 1980s attacking the notion, then widely accepted, that the stock market rationally reflects the true value of the companies whose shares are traded on it. He and real estate specialist Case then teamed up to show that home prices are even more subject to booms and busts than stocks. They did it by measuring repeat...
After publishing a best-selling critique of the stock bubble, Irrational Exuberance, just as the market peaked in March 2000, Shiller set to work adding a chapter on real estate for the second edition. As part of that effort, he cobbled together an inflation-adjusted index of home prices going back to 1890, which showed that a) the price runup from 1997 to 2006 was by far the biggest on record and b) home prices can fall for decades. Put those two together, Shiller argues, and it's at least possible that we're due for an epic decline...
...latest economic news hasn't been encouraging. Gas prices reached an all-time high earlier this month. For the first time since 1991, quarterly home prices declined, according to the S&P/Case Shiller U.S. Home Price Index. And yet analysts were surprised by the unexpected rise in consumer confidence in the economy, reported this week in the Conference Board's Consumer Confidence Index...
There have, however, been a couple of notable nonstarters. The London Futures and Options Exchange halted its property futures in 1991 four months into trading, after a scandal erupted over dummy trades. In 1993 the Chicago Board of Trade, with help from Shiller and Case, readied its own foray but then pulled the plug prelaunch. The nature of houses is an impediment, says Craig Pirrong, professor of finance at the University of Houston, because speculators crave volatility and home prices change slowly--and even within one city, there can be vast differences in values...
Trading volume at the Chicago Merc has been thin so far, with interest in Miami, New York City and Los Angeles far eclipsing Denver, Chicago and Boston. But a slow start is often the case with derivatives. Shiller, who helped design the housing-price indexes the Merc contracts are based on, points to S&P 500 futures, which were half-heartedly received in 1982 but today are a Merc staple. For housing futures, the exchange is already looking to add more cities and contracts past 2007; homebuilders who want to hedge new subdivisions have requested the longer horizon. The Chicago...