Bloomberg Interview: Shiller on Momentum vs. Fundamentals in Housing Prices
On Tuesday, Bloomberg talked with Professor Robert Shiller regarding the latest reported figures for the Case-Shiller home price index, which rose 1% in the month of August from September. In the interview, Shiller openly wonders whether the turnaround is sustainable. He does, in part, agree with an earlier Goldman Sachs report that there will likely be a dip in home prices sometime in the near future as the government withdraws its support from the market. However, he is not sure that the rise in home prices is purely a result of federal stimulus and intervention in the housing markets. Shiller states that he used to believe in considering fundamental factors only when looking at housing data, but learned that momentum usually drives these markets. Finally, Shiller left open the possibility that the rise in home prices may lead to more houses being put up for sale in the market, thus leading to addition supply and potential price declines.
CB: Fundamentals or momentum? Shiller appears unable at this time to discern which of these factors is having more impact on current home prices. Sometimes CB thinks that the media and some investors prefer to regard fundamentals and momentum as mutually exclusive. These two factors are very much related in nearly every possible market. At times, fundamentals may trigger momentum and vice-versa. Furthermore, one has to consider the impact of the fundamentals from other markets. There is a theory, that the relative increase in base money supply and the relatively large amounts of cash that people have been holding have helped to fuel the recent rallies. If this is true, then the fundamentals in money supply may have allowed for momentum to occur in other markets such as the stock market. Yet, if some negative fundamental news were to be released and it caused enough market participants to have the same reaction, then that fundamental factor could sway the momentum in a negative direction. Do both (1) the relatively low interest rates on mortgages and (2) the first-time home-buyer tax credit trigger more than a fundamental increase in housing demand? Basically, does increased demand in the market lead to more demand? For instance, did the many first-time buyers that rushed to buy houses before the expiration of the tax-credit create enough demand that prices reached levels where these buyers may have spent more now than they would have if there wasn’t a tax-credit? The problem with momentum for fundamentalists is that it’s hard to understand and objectively measure what drives it. Momentum can change very quickly and with great magnitude, thus causing potentially large losses in the markets for those who cannot exit their positions quickly. Momentum can also prevail in one direction for years. Basically, CB understands why Shiller seems to be struggling with the relationship between fundamentals, momentum, and the future direction of the Case-Shiller home price index.
Tagged with Case-Shiller, Fundamentals, Housing Market, Momentum, Robert Shiller
