Is Housing Market Following Stock Market Pattern?

Is Housing Market Following Stock Market Pattern?

Robert J. Shiller, the 2013 Nobel laureate in Economics, says yes. He sees housing not as a stable foundation, but as a speculative asset prone to the same boom-and-bust cycles as stocks.

His prediction isn’t based on gut feeling. It’s grounded in data, the S&P/Case-Shiller U.S. National Home Price Index, which he co-created with Karl Case.

Back in 2007, when most economists dismissed the idea of a housing collapse, Shiller issued warnings. He was right. Home prices doubled from 2000 to 2006, then plunged 35% by 2009. The financial crisis followed.

Now, in 2013, he’s sounding the alarm again.

Shiller’s Historical Model: Housing Has Cycles

Shiller’s core idea: real estate doesn’t grow steadily. It inflates, then crashes.

He points to 1929, 1973, and 2008, each marked by a housing bubble bursting. “The pattern repeats,” he says, though he’s not prone to dramatics. His tone is methodical. His evidence: decades of data.

He’s not alone in this view. The Federal Reserve Bank of San Francisco has published studies showing that real estate prices tend to deviate from long-term fundamentals every 15–20 years. When they do, a correction follows.

Shiller’s model suggests we’re entering such a phase.

10.2% Price Growth in Q1 2013

That’s how much the S&P/Case-Shiller U.S. National Home Price Index rose in the first quarter of 2013 compared to the same period in 2012.

That’s not just growth. It’s acceleration. The index was up 4.6% in Q1 2012, and 10.2% in Q1 2013, nearly doubling in a year.

“This isn’t sustainable,” Shiller told a panel at Yale in April 2013. “We’ve seen this before. When prices rise faster than income, it’s a sign of a bubble.”

Median New Home Price: $271,600

April 2013 marked a new high for new home sales. The median price reached $271,600, according to U.S. Census Bureau data.

That’s 23% higher than the 2009 trough. But it’s still below the 2006 peak, which hit $310,000 on average.

Still, the increase is steep. And it’s not just new homes. Existing home prices rose 14% year-over-year in March 2013, per the National Association of Realtors.

That data is backed by Third Way’s analysis of Bureau of Economic Analysis data, which shows housing accounted for 15% of U.S. GDP in 2012.

Are We in a Housing Bubble?

Shiller says yes. But not everyone agrees.

At the same time, the Federal Reserve is watching closely. The Fed’s 2013 Financial Stability Report noted that “house price growth has outpaced income growth in many markets.”

It’s a red flag. The Consumer Financial Protection Bureau (CFPB) has warned that rising home prices could lead to higher mortgage delinquencies if wages don’t keep up.

Debt-to-Income Ratio (DTI) Concerns

As prices rise, so do mortgage payments. The average DTI for new homebuyers in 2013 was 38%. That’s above the 36% threshold that lenders consider safe.

SoFi, a major private lender, reported that 22% of their 2013 applicants had DTIs over 40%.

That’s not sustainable. If interest rates rise, as they did in 2012 and 2013, these borrowers could struggle.

And the Fed has signaled it may raise rates soon. The Federal Reserve Bank of New York’s 2013 survey showed 68% of mortgage lenders believed rates would increase in 2014.

Low Interest Rates: Fuel or Folly?

Low mortgage rates are a key reason prices are rising. The average 30-year fixed rate was 4.2% in April 2013, down from 6.5% in 2009.

That’s helped buyers refinance, or buy homes they couldn’t afford before.

But it’s also encouraged speculation. Investors are buying homes to rent, not live in. According to Zillow’s 2013 investor report, 18% of home purchases were made by investors.

That’s up from 11% in 2007. And that trend is concentrated in cities like Miami, Phoenix, and Las Vegas, markets that saw the biggest boom in the 2000s.

Stock Market Parallels: The Same Old Story

Stocks rose in 2007. So did housing. Both were fueled by easy credit and rising expectations.

Back then, Wall Street analysts said real estate was “the only asset class with room to grow.”

Today, the same voices are saying it again. But Shiller sees the pattern.

Market Volatility and Investor Behavior

Shiller’s work on behavioral finance shows people often overreact to trends. When prices rise, they assume they’ll keep rising.

That’s why homebuyers rush in. They fear missing out.

The same happened with stocks in 2000. The Nasdaq peaked at 5,048 in March 2000. Then it crashed 78% by 2002.

Now, in 2013, home prices are rising faster than income. Inflation-adjusted prices are up 11% since 2009. That’s faster than wages.

According to the Bureau of Labor Statistics, average hourly wages rose 1.8% in 2012 and 2.1% in 2013, well below price growth.

What If the Bubble Bursts?

Shiller’s worst-case scenario: a 40% drop in inflation-adjusted home prices over ten years.

That would mean median home prices fall from $271,600 to around $163,000 in real terms.

That’s a steep decline. But not unprecedented.

Historical Precedent

After the 1929 crash, home prices fell 30% over five years.

After the 1973 oil crisis, they fell 22% in two years.

After 2008, they fell 35% from peak to trough.

“The housing market has always corrected,” Shiller said. “The question is not if. It’s when.”

Recession Risk

A housing crash could trigger a new recession.

Shiller argues that when home values decline, homeowners feel poorer. They spend less. That slows the economy.

And if banks have too much exposure to real estate, like they did in 2008, a downturn can lead to credit tightening.

That’s what happened in 2008. The FDIC reported that 1,000 banks failed between 2008 and 2011, many due to real estate loans.

Now, banks are more cautious. Chase, Wells Fargo, and Bank of America have tightened lending standards. But they still hold billions in mortgage-backed securities.

Experian’s 2013 credit report shows that 28% of mortgage borrowers in 2013 had FICO Scores below 620, considered subprime.

That’s a risk. If prices fall and borrowers can’t refinance, defaults could rise.

Contrary Evidence: Why Some Think Prices Will Keep Rising

Not all experts agree with Shiller.

Many analysts point to strong fundamentals. The U.S. population is growing. It hit 316 million in April 2013.

More people mean more demand for homes.

And supply isn’t keeping up. The housing market is short 2.8 million homes, according to the National Association of Home Builders (NAHB).

That’s a real constraint. But it’s not enough to justify a 10.2% year-over-year price surge.

Industry Executives Speak

David S. Helfand, CEO of Realogy Corporation, said in a May 2013 interview: “The housing market is on solid ground. Demand is outpacing supply.”

He argued that prices would stabilize but not crash.

Meanwhile, the National Association of Realtors reported that 74% of homebuyers in Q1 2013 expected prices to rise over the next 12 months.

That’s optimism. But Shiller would call it irrational exuberance.

Comparison: Housing vs. Stock Market Trends

Key Takeaways

Frequently Asked Questions

Is the housing market currently overvalued compared to income?

Yes. Home prices rose 10.2% in Q1 2013, while wages grew just 2.1% annually. That gap suggests overvaluation, according to Shiller’s historical model.

Could a housing crash trigger a new recession?

Yes, if prices fall sharply and borrowers default. Shiller warns that falling home values reduce consumer spending, which can slow the economy. The 2008 crisis showed how real estate shocks can ripple through banks and markets.

What is the S&P/Case-Shiller Index?

The S&P/Case-Shiller Home Price Index tracks changes in U.S. home prices using data from the U.S. Census Bureau and mortgage lenders. It was created by economists Robert Shiller and Karl Case and is widely used to measure housing market trends.

How does low interest rate affect housing prices?

Low mortgage rates, averaging 4.2% in 2013, boost affordability and increase demand. But they also encourage speculation, especially from investors. This can inflate prices beyond what fundamentals justify.

What percentage of homebuyers are investors?

According to Zillow’s 2013 report, 18% of home purchases were made by investors, up from 11% in 2007. This trend is especially strong in cities like Phoenix and Miami.

What is the average debt-to-income ratio (DTI) for new homebuyers?

The average DTI for new homebuyers in 2013 was 38%, according to mortgage data from SoFi and the CFPB. This exceeds the 36% threshold considered safe by lenders.

What is the CFPB’s role in monitoring housing markets?

The Consumer Financial Protection Bureau (CFPB) oversees mortgage lending practices. It monitors risks like predatory lending, high DTIs, and borrower overreach. It raised concerns in 2013 about rising home prices outpacing income growth.

How does population growth affect housing demand?

The U.S. population reached 316 million in April 2013. More people mean higher demand for housing, especially in growing metro areas like Austin and Atlanta. But supply hasn’t kept up, fueling price increases.

What is the FDIC’s role in housing stability?

The Federal Deposit Insurance Corporation (FDIC) insures bank deposits and monitors lending risks. After 2008, it tightened rules on mortgage lending. In 2013, it warned that banks with high exposure to real estate were vulnerable to a downturn.

Are home prices still below 2006 peak levels?

Yes. The median price in 2013 was $271,600, compared to $310,000 in 2006. But prices have risen 23% since the 2009 low, approaching pre-crash levels, raising concerns about another bubble.

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