Robert Shiller on housing: Don’t trust momentum

A striking surge in U.S. home prices this fall was not enough to convince one of the nation’s top housing economists that the recovery is on solid ground.

“We can’t trust momentum in the housing market anymore,” Nobel Prize-winning economist Robert Shiller said on CNBC’s “Squawk Box.”

Why not? Investors, and specifically, institutional investors with vast sums of cash. They have bought approximately 100,000 homes, the majority of them previously foreclosed properties. They bought the homes in a limited number of markets, mostly in the West, and pushed prices dramatically higher in these regions, as competition for the properties increased. Now they are renting them and even selling bonds backed by the rental streams.

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The trouble, according to Shiller, is that investors are a fickle bunch, and should they see lower-than-expected returns, they will not hesitate to dump the properties and move on to another trade.

“They’ve learned that there is short run momentum in housing,” said Shiller.

Source: World Economic Forum Robert Shiller

Source: World Economic Forum
Robert Shiller

In fact, they may already be moving on. Institutional investor purchases represented just 6.8 percent of all sales in October, according to a new report from RealtyTrac. That is a dramatic drop from 12.1 percent in September and is down from 9.7 percent a year ago. While one could point to the housing recovery and the related drop in the number of distressed homes, sales of bank-owned homes actually increased in October, both month to month and year over year, according to RealtyTrac.

“There is notable weakness in the new-era, Fed-inspired investor, flipper/renter regions, i.e. California, Arizona, Nevada, with a surge in supply,” said housing analyst Mark Hanson.

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Not only are prices far higher for investors, but for regular home buyers they are even more expensive now than they were during the housing boom. That is because unlike the days of cheap (even free) and easy credit, those regular buyers now have to use traditional, more expensive 30-year fixed mortgages with large down payments.

All-cash investors pushed the prices up, now up over 13 percent from a year ago, according to the latest S&P/Case-Shiller report. That surge is far higher than income and employment growth, and therefore priced regular buyers out.

Home ownership has declined dramatically, but even more stunning is that there are about 15 percent fewer homeowners under the age of 35 and between ages 34 to 44 than there were in 2005, according to Deutsche Bank researchers.

Renting is not only more necessary but more popular among younger demographics. Witness the 24 percent jump in multifamily building permits in October, according to the U.S. Census, reaching the highest level of permits since the middle of 2008.

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“The rise in multifamily permit activity is a justified response to the strength of renter,” noted Paul Diggle of Capital Economics.

That is why most large investors are clearly not dumping all their properties to take advantage of price gains: They are seeing too much renter demand. Still, they are slowing their purchasing and putting some homes on the market.

So if investors really are moving out of the market and even getting ready to sell some of their homes, at far higher prices than they bought them, then housing could take yet another turn for the worse. There just is not enough regular consumer demand to make up the difference.

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“I don’t see evidence that people think we are launching out on some great new era,” said Shiller of today’s home buyer. “I don’t find that they’re as excited about the housing market as price increases would suggest.”

By CNBC’s Diana Olick. Follow her on Twitter @Diana_Olick.

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