A Nobel Prize-winning economist says the Federal Reserve’s ongoing economic stimulus is combining with increasing market speculation to produce a new housing bubble.
Robert Shiller, who shared this year’s Nobel Prize for economics with Eugene Fama and Lars Peter Hansen, told Reuters that housing prices in some markets have risen too fast because of the Fed’s continuing easy-money policies.
“This is a very rapid price increase right now, and I believe that it is accelerated somewhat by the Fed's policy," Shiller said. Last year the Fed began an $85bn-per-month bond-buying stimulus program to keep borrowing costs down. It’s also held interest rates near zero since 2008.
Home prices have seen double-digit increases over the last year as inventories tightened. Shiller said the increases in some areas may have been too rapid.
“When asset prices are getting way out of line it should be cause for alarm. The monetary authorities should lean against extreme asset price movements,” he told Reuters.
Shiller says the “bubbly” housing market he sees isn’t entirely the result of the Fed’s easy-money policies. The majority of the increase, he theorizes, is the result of increased speculation.
“We cannot expect monetary policy to cure all of these problems,” he told Reuters.
Shiller has some street cred to back up his theories. He warned in 2005 that the housing market might be overextending itself and is one of the creators of the Case/Shiller Index, a respected gauge of housing prices.
One of his co-winners, however, is more cautious about calling the latest housing boom a bubble.
“We often underestimate how much uncertainty there is in terms of our understanding of the economy,” Lars Peter Hansen told Reuters. “If you pretend that we know more than we do, you are in danger of constructing policies that can be counter-productive.”