Is another housing bubble on the horizon?

Yale Sterling Professor and Nobel prize-winning economist Robert Shiller joined Yahoo Finance to discuss the latest in housing trends.

Video Transcript

ADAM SHAPIRO: Things are getting more expensive if you're trying to buy a house. And it's 10 consecutive months of accelerating prices. Let's bring in Nobel prize-winning economist Professor Robert Shiller. He is Professor at Yale University. It's good to have you here.

And I just want to start generically, because is this different, this kind of acceleration that we're witnessing, than what we saw in the buildup to the financial collapse of 2008? Should we be worried, and are you?

ROBERT SHILLER: Yeah, I've been saying I think one should be a little worried. It looks like 2003 again. You can see it in this chart. It kept going up.

You know, this is not a market that collapses overnight. It's less short-run volatile than the stock market. But you can see that we are seeing price increases now that haven't quite been realized since those years just before the financial crisis.

SEANA SMITH: Well, how do you explain, I guess, what's going on in the housing market? Is it all because of Fed policy? Is it all because the changes that we're seeing because of COVID? I mean, what exactly do you think are the dynamics at play that are pushing us to see some of the numbers that we've been seeing over the last several months?

ROBERT SHILLER: Well, of course, the low interest rates are part of it. But I think it's also a-- I've written a book called "Narrative Economics." I think people are driven by narratives. It changes the market sentiment. "Market sentiment" is a good word.

We had some interesting profit that some people have made. We think of Bitcoin, which people thought had collapsed. And then it's back, and then it's trouble again.

But these are attracting a kind of general retail crowd who is suddenly interested in-- they have more time on their hands, some of them, because of the coronavirus. They're thinking about repositioning themselves because of recent fears. It doesn't map one to one into a clean explanation why the market is doing what it is now. But I think it is some kind of irrational exuberance. People are having fun, and they will as long as prices keep going up.

ADAM SHAPIRO: When we talk about housing prices, though-- and I apologize for I keep coming back to this. But having lived through that correction that was only within the last 15 years, are we going to have another one of these? What worries you about it? And you actually cite the fact that people don't seem to be hedging against the future price increases.

ROBERT SHILLER: Yeah, there's a certain lability of attention. We tend to pay attention to what other people are paying attention to. So in the housing market, we're paying attention to maybe the demand side.

There's also the supply side. You can see that in lumber prices, for example. Builders might be building to profit from these high prices now. But it hasn't happened yet. It will happen eventually, I suppose. But we created our futures market at the CME 15 years ago to help builders make more rational decisions.

So our futures market is now predicting big increases over the next year or more. But it's not certain. And people have a sense of risk. I wish they'd use the futures market more than they have been.

SEANA SMITH: So it sounds like even in a year from now, if you're looking to buy a home and you're saying right now it's too crazy, it's too crowded, too many people are looking and they're going too quickly, a year from now it doesn't sound like you think the situation is going to really improve at all.

ROBERT SHILLER: There's a lot of momentum in the futures market. There's a little momentum in the stock market. It's talked about a lot, but it's much weaker than the momentum in the housing market. And that weaker momentum eventually carries us into a different situation.

So I think that home prices are likely to be higher for another year or two. And that will bring in a supply response, and they'll come back down-- not overnight, but enough to cause some pain.

ADAM SHAPIRO: You just said enough to cause some pain. Is this a bubble? Is this a similar bubble to what we saw in '06, '06-- well, in 2006 and 2007?

ROBERT SHILLER: Well, it's not the same. Every bubble is different.

ADAM SHAPIRO: But is this a bubble?

ROBERT SHILLER: It has aspects of a bubble to it. There's excitement. People are talking. And some people are bidding way more than the asking price, and that becomes a narrative or a story. So it has a certain amount of excitement in it.

It's different, though because I think it's related to the psychology of the coronavirus, which hasn't quite left us. So it's a little bit like in the flu epidemic of 1918. It had a second wave. It didn't disappear until after 1919. But then we had the Roaring '20s.

So it kind of reminds me of the spirit that ended after World War II, for example. There was a spending spree by people. They were jubilant. The war is over. They were taking what they called victory vacations. And we're kind of in that mood again as we're coming out of the coronavirus.

So it's not the same as 2003. It could be stronger. We have better protections. We have better supervision of lenders. So I don't know if we should be worried about 2007/2008/2009 happening again, but it is disquieting. That's why I think people might want to hedge their housing risk.

SEANA SMITH: When we talk about hedging their housing risks, I mean, looking out across the country-- because it's a different scenario playing out in certain areas here of the US. When you look at specific regions, the regions that have seen the biggest increase here over the last 12, 14, 16 months-- what areas, I guess, concern you the most? Is there a specific area?

ROBERT SHILLER: Well, the biggest increase over the last year was Phoenix. And home prices have gone up 20% in one year. That's a big change. And you see it in San Diego. There's a whole listing of these.

The weakest city is Chicago. But even Chicago went up 9% in the last year. These are quite strong numbers, and I would predict they will continue for a while. People have to consider that when they're thinking about making changes in their housing situation.