Although you’d think that when a celebrated Yale economics professor is queried about home prices, he’d trot over to the whiteboard and start scribbling equations. If the prof in question is Robert Shiller—co-creator of the Case-Shiller U.S. National Home Price Index—all the more so. The Index has become the benchmark reference tracking residential real estate prices. When it comes to American home prices, Shiller is The Man.
So when the vaunted economist seeks to examine the factors best explaining the latest dramatic changes in Southeast Michigan home prices, you expect to hear a lot about the inflationary effects of trillion-dollar government expenditures, the bond market’s inverse reaction to Fed funds management, etc., etc. You expect formulas with math symbols you haven’t seen since high school, strung together in convincing and incomprehensible sequences. What’s the reason why the pandemic triggered huge price increases? Shiller’s answer, you’d expect, would look something like a sophisticated mathematical formula.
The last thing you’d expect is a discussion of young couples’ feelings, hopes, and dreams. You wouldn’t think Professor Shiller would now be concentrating less on numerical analyses and more on patterns in Americans’ emotions—even on “their occasional flights of fancy.”
But for this month, at least, that’s what you’d find. The Shiller team’s latest research delves into the reasons for the long- and short-term expectations of the general homebuying public tracked through questionnaires collected annually from 2003 through 2021.
An overview of that research appears in the August edition of Yale Insights as “Do Homebuyers’ Expectations Align with Reality?” It summarizes the first draft of the Shiller team’s latest findings. Although the answer to the title’s question boils down to a less-than-satisfying ‘yes and no,’ some preliminary conjecture about people’s motivations could explain at least a portion of recent Southeast Michigan home price movements.
As a rule, people tended to correctly recall price movements in their own areas for the past several months as well as to “rationally” gauge future increases or decreases for the coming year. But their long-term projections “seem to have more of a life of their own.” In the early 2000s, perhaps driven by envy-producing house-flipping stories on TV, projections were wildly optimistic. Then, during the decade-long recovery after the recession, the opposite held.
And then came the COVID-19 crisis, nicely summarized with, “Then the pandemic threw everyone for a loop.” The July 2020 survey characterized a homebuying public split on expectations, with an average home price rise expectation for the coming year of only 3.4%. The actual 20% rise remains to be fully understood—but one interpretation is that, rather than freezing people into inaction, fear of coronavirus motivated them “to do something to get rid of this anxiety.”
In today’s post-COVID market, would Shiller urge aspiring homebuyers to wait to see if home prices will slow down in the coming years? Hardly. “If you have your heart set on buying a home,” says Shiller, “go ahead.” I’d only add one more studious piece of advice: Call me!
