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The co-founder of the S&P/Case-Shiller Home Price Index has studied the latest round of home price increases and has concluded the upward activity is being fueled by emotional impulses rather than economic reality.
“These markets, I think, are substantially driven by psychology,” said Robert Shiller, a Yale economics professor, during an interview on the Fox News show “Cavuto: Coast to Coast.” “And the psychology now is a little bit hard to interpret. Note that the cities with the biggest price increases are successful tech, entrepreneurial cities in many cases. So maybe people kind of believe in these markets as their salvation or their hope.”
Shiller pointed out that while home prices are on the rise, the emotional value that people invest in housing is not as strong as in the pre-bubble era.
“People aren’t as impressed by homes anymore after they saw how they collapsed in price with the financial crisis,” he continued. “So it’s not such a clear case. I don’t think people are as impressed by big McMansions anymore as they used to be.”
Nonetheless, Shiller did not recommend that people forego housing as an investment.
“The other thing about housing is that if you put yourself into a mortgage and you pay it off, you’re putting yourself into a saving program,” he stressed. “A lot of people don’t save outside of some kind of a discipline device like that. So in that sense housing is a good investment.”
The latest S&P/Case-Shiller Home Price Index U.S. National Home Price Index recorded a 5.4 percent annual increase in January, while the 10-City Composite showed a 5.1 percent gain for the year and the 20-City Composite’s year-over-year gain was 5.7 percent. David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, warned that if “home prices continue to climb at more than twice the rate of inflation, the low inventory of homes for sale—currently about a five month supply—means that would-be sellers seeking to trade-up are having a hard time finding a new, larger home.”