Smear Attack?

By Lawrence Yun, Chief Economist

A blog written by one of the top real-estate professors, one whom I highly respect, demanded recently that I apologize to Robert Shiller for my "disgraceful smear."  Dr. Shiller is the one of authors of the repeat home price methodology. This methodology is the basis for constructing what is called a constant-quality home price index, which is applied in OFHEO's house price index and, of course, the Case-Shiller home price series.

Here are Professor Richard Green's words:

"This is a disgraceful smear. I don't always agree with Shiller (I thought and still think he called the housing bubble prematurely), but he is a great and scrupulous scholar. His work has been cited on google scholar more than 10,000 times; Lawrence Yun has been cited twice. Despite this, I have seen Shiller express becoming modesty about his attempts to get a futures market going--something that would very much benefit consumers, were it to work, and that could reduce volatility. I am actually skeptical about whether futures markets can work in the housing market, and people actually hedge themselves pretty well by using mortgages (which are essentially a short position). But I very much admire Shiller's efforts to get one going--it is rare that such a first rate academic tries to create something so useful. As for Lawrence Yun's potential conflict of interest, let's not go there. But he owes Case and Shiller both apologies. …"

Perhaps I should have been more careful in my wording when I referred to Dr. Shiller having an incentive to "scare" the market. Dr. Shiller has been one of the most pessimistic prognosticators regarding the housing market forecast for the next several years - with U.S. home prices falling to the tune of 40 percent over the next decade. Who in their right mind would buy a home if such predictions are to be believed? When people ask me if Dr. Shiller is purposely trying to scare the market for his financial benefit, I reply that he is a well-respected scholar and I believe he genuinely believes that home prices will deeply contract. I further add that I do not think he wants to personally profit from people using hedging strategies as offered by his company MacroMarkets. It is a financial innovation that may indeed bring many societal benefits at some point by spreading risks to those who can presumably better handle them. However, one key element that has been missing in this discussion is disclosure.

I have been in enough committee meetings to know that the usual first item of business is the disclosure of any potential conflict of interest. It is a fact that Robert Shiller's company MacroMarket is a for-profit company. It is a fact that it will derive more profit if people engage in hedging activity. It is a safe bet that more people are likely to hedge if they believe home prices will plunge (though possible, I do not believe the human mind is set up such that people would want to hedge if prices rise significantly, as some have contended to imply a neutrality of the hedging instrument). To the question, is Professor Shiller out to purposely scare the market: I clearly think not, I certainly hope not. But certainly a potential conflict of interest exists and this is information that needs to be known. Outside of academia, to not fully disclose such important details would invite harsh criticisms. A simple disclosure will clear it all up.

A full disclosure on my part is that I work at NAR. My salary has a no-commission component and is in no way related to home sales activity. I do economic analysis strictly from a research point of view. I readily admit: sometimes I get things wrong. At no time was I ever pressured to say or do one thing or another. Having talked to REALTORS® across the country, I know they want only honest assessments.

As to our members, a majority of our REALTORS® no doubt financially benefit from increased home sales activity (though our commercial real estate REALTORS® prefer lower home sales as they derive their income from rental housing, including apartments, development, brokering, and property management). Let's be clear, nearly every profession benefits from increased business activity in their arena and every profession is out promoting theirs, just as NAR promotes the value of property rights and long-term homeownership. Even non-profit organizations including colleges and universities benefit by actively promoting the value of education and research, and by seeking funds. We live largely in a free-enterprise system based on property rights, voluntary transactions, the free exchange of information, and casting votes to help determine the appropriate role of government. It is the best system to produce what people value and the best system to permit people to aspire and accomplish (or, paraphrasing Winston Churchill, perhaps it is the worst system except for all others). In making these individual choices, people need complete information. And I see nothing improper with providing information about any potential conflict of interest.

Along with providing complete information we need to respect people's choices, including people's desire to not buy now. Having said that, I firmly believe we have swung from a period of excessive consumer exuberance of the housing boom years to now excessive consumer pessimism not based on the entire story. The notion of buy, buy, and buy at all times is simply wrong. Many have pedaled such statements during the housing boom years. No one benefits from rising home sales followed by rising foreclosures. Sustainable homeownership is what we need to strive for.

I am at the same time disturbed by the pessimistic wait-game that could potentially lead to a self-fulfilling prophecy. As I have been saying in my other commentaries, fundamentals cannot justify the current 10-year low home sales pace. I believe the pendulum has swung back far the other way currently. Pessimism is holding back many potential home buyers. It is leading to rising inventory, falling prices, and higher foreclosures. Financial companies are further pressured from bad loans associated with falling home values. Fannie and Freddie bear added risk from falling home prices. Many firms are impacted.

The near 3-year housing downturn has been subtracting economic growth by about one percentage point or $130 billion per year. If I am right in my assessment that pessimism is holding back buyers, then millions of additional people will suffer the real consequences of foreclosures, lost of income, and loss of jobs - all unnecessarily driven by pessimism. If I am wrong in my market assessment then the low sales and rising foreclosures may indeed be needed necessary market adjustments to be flushed out. Some local markets clearly went overboard and need to correct. Only after significant price cuts will some of these local markets return to proper balance and bring back home buyers. But broadly speaking, I believe the current downturn at this stage of cycle is being driven more by consumer pessimism than by necessary market correction.

Dr. Shiller carries a lot of weight both in academia and in public discussion. He earned that weight through years of exemplary research work. As a firm believer in the trials and successes of dynamic entrepreneurship in this country, I very much value Dr. Shiller's entrepreneurial energy in trying to bring financial innovation to the marketplace. The question I raised, or am guilty of, is just hinting at a potential conflict of interest and incentives facing Dr. Shiller's private business. Full disclosure, however, will put those issues to rest.

Dr. Shiller will surely share my view on the desirable goal of sustainable homeownership. Again, it is not in society's or REALTOR® members' interest to push someone into homeownership when not financially or mentally ready. It is also not in the society's interest to induce fear to cripple the marketplace.

One of the goals of NAR Research work is to promote financial literacy, which in turn will promote a sustainable higher homeownership rate. Young adults growing up stuck to MTV and credit cards cannot be healthy for the country over the long haul. As such, there is value for general consumers to recognize the differences between the Case-Shiller Home Price index and NAR median price or in the arguments on when the housing market will turn around.

My best days have been in giving talks to REALTORS® across the country. Many have commented on the educational value of my talk. I appreciate that they appreciate it. It is extremely refreshing to have a face-to-face chat with our members who in prior careers have been (to name a few): police officers, Olympic downhill skiers, elementary school principals, human resource personnel, computer programmers, steel workers, soccer moms, MBA graduates, former local TV personalities, and city mayors. It is a terrific job to be able to tap into virtually every corner of American life and share stories and get folks to participate in democracy.  Key legislation and many (de-)regulations could not have been possible without REALTORS® help.

Let me end this commentary with Case of Case-Shiller, who is not a principal in Macromarkets - the mentioned hedging instrument company. Professor Chip Case has been commenting lately that people should just go ahead and buy a home if they want to be a homeowner and are financially ready without trying to market time the purchase. Forget the fear and just go ahead and jump. Is that now a Case against Shiller?

 

Read moreof Richard Green's blog entry.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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