Advice From Robert Shiller: Don’t Expect a Boom to Follow a Bust

The folks at the Motley Fool recently interviewed Yale professor Dr. Robert Shiller (co-creator of the S&P/Case-Shiller Home Price Indices and author of the new Finance and the Good Society) on the topic of the housing market’s current direction. As the Motley Fool’s Brian Richards pointed out in “Where To for Home Prices,” the signs appear confusing — home prices are on the decline, while homebuilder stocks are at 52-week highs.

Shiller quickly discounted the significance of confidence among homebuilders (they can, after all, choose where to build), then focused on what appears to be a nagging theme among reporters interviewing him: the idea that “there’s going to be a day soon and then it’s going to zoom up again.”

Hmm, time for a little self reflection here. The boom wasn’t so long ago, and we watched home prices rise with such inexorability that house appreciation came to look like a law of nature. No wonder it can be hard to imagine that the bust wasn’t just a long winter’s cold, after which we’ll all start feeling better again.

But, points out Shiller, “this recent boom and bust is unique. It hasn’t happened at such magnitude on a national scale before.” And, as he further details, comparable busts on a regional level did not turn around for decades.

The lesson seems to be that we need to think of the bubble as the temporary illness. In fact, Shiller states, “Bubbles are social epidemics, and are we primed for another one now? I don’t see it . . . .”