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If Case-Shiller Index is Hot, Why is its Founder Doubting?

No one likes a worrier at a kickass party, so a lot of investors are tuning out Yale Economist Robert Shiller’s warnings about overly optimistic expectations for the housing market. But considering this man’s data is largely responsible for those triple-digit gains in certain housing stocks – and that he nailed the last housing bubble before anyone else -- it’s probably wise to consider his interpretation. While we can’t imagine that Shiller would say “sell off your housing stocks now,” his take on those numbers makes us wonder if a little profit-taking here might be a very good idea.

Shiller is, of course, one founder of the Case-Shiller indices that measure home prices around the country. These indices, which use standardized sets of locations and adjust prices for inflation, are the favored forward indicators of housing market trends generally. Rising prices of existing homes bode well for everyone in the business, as it implies more mortgages, remodeling and demand for space; perhaps even new space.

Case-Shiller Home Price Index: Composite 20 Chart

Case-Shiller Home Price Index: Composite 20 data by YCharts

That sharp upward curve in the index has sparked industry activity and a lot of housing-related investment in the stock market. New housing starts are at a five-year high. Exchanged traded funds such as iShares Dow Jones U.S. Home Construction (ITB) and the SPDR S&P Home Builders (XHB) have soared. That SPDR fund has shot up 38% in the past month alone. Shares of numerous individual housing-related companies such as PulteGroup (PHM), Masco (MAS) and DR Horton (DHI) are showing 60%-plus gains in the past year, as seen in a stock chart.

PHM Chart

PHM data by YCharts

Shiller tried to damp down what he sees as unsustainable optimism in the sector with a New York Times column in late January. He noted that short-run rises in home prices as seen in that Case-Shiller Index chart above have been “virtually worthless” as indicators of where prices will be five years or more down the road. In subsequent interviews, he pointed out that the 2009-10 price rise, which occurred when data indicated similar economic conditions, collapsed in 2011. He basically worries that the massive losses suffered in the housing market messed with our heads, leading investors to believe that home prices will rise faster and higher than realistically possible. He expects a lot of real estate bubbles from here on out.

Meanwhile, the market chatter about housing is getting giddier. The latest Case-Shiller numbers, which look at December data, showed home prices up more than they have in six years. Sales of new homes jumped in January by the most in 20 years. Pending sales of existing homes also are way up.

Shiller says he can’t rule out another housing boom. But, he wrote in the NYT piece, “I wouldn’t put any money on that.” In other words, he’s not going to argue against the notion that great times are ahead for the housing market. He’s just leery of how long they can last.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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