In the April 2006 issue of NewsMax’s Financial Intelligence Report, “Hard Landing: Profit from the Coming Real Estate Crash,” Shiller — the Stanley B. Resor professor of economics at Yale University — said in an interview that “a substantial drop in home prices in many cities is certainly a serious possibility … There’s a scenario for a major decline.”
Indeed, prices have dropped in many areas.
But today Shiller believes his worst case scenario may be yet to come — as homes are still about as overvalued as stocks were before the tech-stock crash of 2000.
In an interview appearing in the May issue of Money magazine, Shiller was credited with calling the dotcom crash with his uncanny predictions in his book “Irrational Exuberance.” Shiller attributed that stock crash to “collective consciousness.”
He said: “Our minds focus on the same ideas. Those [ideas] get reinforced because we hear them all the time. Back in the late 1990s, you kept hearing that you had to stake your claim on the Internet or you’d miss out on the future. No one cared about the present.”
Asked if a similar crash in the real estate market was imminent, Shiller opined: “It doesn’t seem like we’re there quite yet.”
Shiller debunks the myth that residential real estate has been a savvy investment, noting that from 1890 through 1990, the return on residential real estate was just about zero after adjusting for inflation, and he discounted the notion that homes rise 10 percent a year in price.
“If they did, in the long run no one would be able to afford a house,” said Shiller, who is also a fellow at the International Center for Finance.
He warned that there’s a strong possibility the return on real estate will actually be “substantially negative” over the next 10 years.
Shiller clearly puts himself in the contrarian’s corner. He told Money: “I used to coach children’s soccer, and I would tell my players, ‘Stand away from the pack, and sooner or later the ball will come to you.’
“I think relatively few [Americans] are getting away from the pack, investing more outside the U.S. than in.”
Shiller is practicing what he preaches: “I’m probably a little over 60 percent in stocks, almost all of it outside the U.S.,” he said, adding: “I’ve been reducing my exposure to real estate.”