March 24, 2006 -- -- If a prophet is only as good as his last prophecy, then you'd be wise to listen to Robert Shiller. On "Nightline," Shiller offered his considerable analysis of the current real estate market ... and he doesn't bring good news.
It was back in the heady stock market days of 1996 that Shiller, an economics professor at Yale University, gave voice to his first prophecy. He warned that the stock market was overheating and that investment had risen to what he described as irrational levels. The stock market crash that followed was no surprise to Shiller and proved that he had called it right.
Now he's warning that a similar collapse may soon apply to the real estate market. And there's evidence that he may be right here, too.
In statistics published today, the Commerce Department reported that the sale of new homes during the month of February dropped by 10.5 percent. That's the largest decrease in almost nine years. It was also the second straight monthly decline and the possible emergence of a worrying trend.
Shiller said that the same psychology that applies to stock market investors now drives the real estate boom. He called it irrational exuberance, coincidentally the title of his 2000 book about the stock market.
Prices Driven By Emotion
Shiller argued that human emotion, not strategic economic factors, drives prices and property buying.
He argues that many first-time buyers pay inflated prices simply because they fear they'll be left behind. He believes that "glamour" locations, such as Las Vegas and Miami, drive prices upward but the real worth of properties in such giddy locations may be a great deal less.
Shiller has traced the actual financial return that houses produce for their owners. He says that over the long term, house prices roughly match gains in people's incomes and that booms are more often followed by busts, thereby dissipating any major increases in equity.
The National Association of Realtors, unsurprisingly, challenges Shiller's assessment and argues that the market is stabilizing and predicts continued growth, albeit at a more sober rate.
As long as Americans continue to believe that their money is only as safe as their houses, then investment in real estate will continue. But Shiller's warnings are well worth hearing.