Robert Shiller at SPU—Psychology and the Housing Market

Increasingly-famous economist and housing market sage Robert Shiller spoke in Seattle this morning at a business breakfast downtown and this afternoon at Seattle Pacific University. Mr. Shiller’s presentations focused on the role that psychology plays in economic markets, a topic that he explores with co-author George Akerlof in their recent book Animal Spirits.

The morning session consisted of roughly thirty minutes of prepared remarks given to a crowd of about 1,400 local business leaders and people with ties to SPU. The afternoon session was about an hour long, and was more interactive event at a smaller venue with the capacity to seat only a few hundred. After giving a condensed version of the same presentation from the breakfast, the floor was opened for a question-and-answer session.

Dr. Shiller’s primary thesis is that economic markets are strongly influenced by psychology that seems rational to individuals, but on the whole is “collective madness.”

He referred to the notion that prevailed during the housing bubble that home prices never go down as laughable, and said that the ideas that housing is an “amazing investment” and that you can be “priced out” are not supported by the data.

One amusing part of the afternoon session was a story Dr. Shiller related about a localized Los Angeles housing bubble in 1885. In describing the mentality in 1885 Los Angeles, he said that people thought “Los Angeles is special!” He also quoted from an article in the LA Times which was published during the aftermath of the collapse in 1886:

We Californians have learned something. And that is that home prices can’t just go up forever—they have to be supported by something. Never again will Californians make this mistake.

Regarding government bailouts, Dr. Shiller likened the economy to a sinking ship (specifically the Titanic), saying that “we just have to try something,” and “I give them credit for trying.” [Update: As I understood him, Dr. Shiller was proposing that we “try something” not to re-inflate the bubble, but rather to soften the blow of the bursting bubble, and to prevent the opposite of “irrational exuberance” from driving the nation and the world into a massive over-correction that could last for decades.] He also suggested that more should be done to prevent foreclosures, due to the psychological impact of losing one’s home.

After the afternoon session, Ray Pepper (500 Realty) and I were discussing the psychological implications and the moral hazard inherent in mortgage principal reductions, which Dr. Shiller seemed to be promoting. Ray asked Dr. Shiller about this, and he responded that “I’m not a fan of it in the long run, but maybe in the immediate crisis, because people are in trouble.” His ideal solution would be something he calls a “continuous workout mortgage,” where a workout (principal write-down) is pre-specified and priced into the mortgage from the start (a concept described in more detail in his book The Subprime Solution).

Although he declined to give any specific forecasts, the feeling I got from his comments were that Dr. Shiller believes home prices will return to their long-term, inflation-adjusted historical levels, both nationwide and even here in Seattle.

For anyone interested in hearing the entire afternoon lecture, you can listen to it right here:

Feel free to also download a pdf of my barely-legible notes, in which I embarrassingly and inexplicably misspelled Dr. Shiller’s name. Or, for those of you that are really adventurous, you can view an interactive version of my notes indexed to the audio of the event.

If anyone would like to hear the morning lecture, I have a recording of that as well, but the quality is relatively poor due to it being such a large room. Let me know and I will post a link in the comments.

Aubrey Cohen also has a write-up of his take on the morning event here: Put down the instant coffee: Economist warns of depression mindset

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.


  1. 1
    Scotsman says:

    I smell a desperation so overwhelming that all rational thought is pushed aside. Question the premise- why must we “try something” when rationally we know that the bubble can’t be re-inflated, and the excess debt must be cleared? All we’ve really learned is that while Shiller was smart enough to create and maintain a reliable index of home prices, he is no better at dealing with the macro issues than any other currently sought after economist. Just when you thought there might be an adult in the room… Oh well.

  2. 2
    The Tim says:

    RE: Scotsman @ 1 – I don’t think he was proposing that we “try something” in order to re-inflate the bubble, but rather simply to soften the blow and prevent the opposite of “irrational exuberance” from driving the nation and the world into a massive over-correction that could last for decades.

    Not saying I agree with him, just trying to clarify the point he was making, as I understood it.

  3. 3
    EconE says:

    From what I’ve been noticing lately, Los Angeles is “special” and is gonna get quite a bit more “special”.

    $2.7 million Option-ARMs with 1.5% teaser rates?


    $50 million balloon mortgages?


    2009-2011 option ARM resets?


  4. 4
    Ray Pepper says:

    Great synopsis. Actually…outstanding….In my notes I just scribbled ” Gov’t efforts to save a sinking ship”. That statement alone Tim, summed up what Dr. Shiller was telling us.

    As an AVID CNBC watcher for 2 decades Dr. Shiller was celebrity status for me. He is on bi-weekly if not more discussing housing and our “catastrophic” condition we are in. The lecture was far too short and he didn’t answer near enough questions. I continuously raised my hand but did NOT get the microphone.

    While driving home I had various thoughts. Everything he mentioned Tim is what you have been educating people here on the Bubble. He truly reinforced what YOU already know and have learned along the way.

    I also thought about his continual workout mtg and his story of putting the brightest minds in a room and the results you receive.

    My analysis remains the same………………..Its all coming back… Not a matter of if………………..Just when………….

  5. 5
    Max says:

    Thanks for the audio! CR is linking to you, so watch your bandwidth.

  6. 6
    Jason says:

    Neat post, was nice meeting you there, Tim. Too bad Schiller can’t precisely comment with a “forecast” of what he believes will happen next.

  7. 7
    The Tim says:

    By Ray Pepper @ 4:

    As an AVID CNBC watcher for 2 decades Dr. Shiller was celebrity status for me.

    I wasn’t going to post this, but just to make you jealous, I guess I will anyway ;^)

    RE: Max @ 5 – Thanks for the heads up about CR. Will keep an eye on the server logs.

  8. 8
    One Eyed Man says:

    RE: The Tim @ 7

    Great picture! I always wanted a picture of the leader in bringing understandable real estate economics to the american people. But whose that guy in the picture with The Tim?

  9. 9
    Ray Pepper says:

    RE: The Tim @ 7

    GOD DANG IT!!!!!!!! Where was I? I’ll tell you….. Waiting in that long lunch line thinking it was the line to get into the auditorium.

    Thats OK. I still have my AUTOGRAPHED picture of me and Sonics great Jim Mcllvaine.

  10. 10
    David Losh says:

    Group think and Real Estate futures market, Holy Cow, put the bong down and just step away.

    This guy is selling another Media is the Message. You can buy the books and tapes, or subscribe on line, but money is money.

    He almost had me when he was talking about the easy stock market money converting to easy Real Estate profits. I even bought into the idea that working people were envious of the people making more in a week than they made in a year.

    Then he skirted all of the tangible economic reasons why technology created massive wealth. He played the ah gosh to the hilt like just a guy trying to figure it out right along with you.

    Buy the books, the tapes, or subscribe on line so you to can take advantage of the Real Estate futures market coming to, did he say Ebay?

  11. 11
    Ed says:

    Really fine post report, thank you. Sorry I didn’t get my candidate question to you in time:

    Please ask Shiller this central question …
    In your opinion,
    will asset-market extreme mispricing be well-deterred,
    if and when
    real inflation-corrected asset-market price histories
    are well-apparent to the people?

    Shiller will know what you are talking about. He has such (roller-coaster!) histories charted in the book Irrational Exuberance, both editions. And see such in the first chart here:
    “Real Dow & Real Homes & Personal Saving & Debt Burden” at

    A previous comment wondered about the future. If you want to use extrapolated straight line fits, look here:

  12. 12
    Erik says:

    i guess you were all there too. Tim, never read your blog before, but I told CR to check your stuff since i saw your note that you were posting something. i had some quotes, but didn’t have the complete audio, so thanks for this.

  13. 13

    RE: The Tim @ 7
    That’s a cardboard cut out of Schiller with The Tim, like some people have cardboard cut outs of Jean Luc Picard of Star Trek.

  14. 14
    One Eyed Man says:

    RE: Ira sacharoff @ 13

    Heck, I even put a dimmer switch in my family room so I can pretend the can lights are a transporter. According to Realtor magazine that improvement will return over 90% on resale.

  15. 15
    Scotsman says:

    I’m ready for a change, One Eye, let’s go! I just can’t decide between Island of the Amazons or the dark side of the moon.

    How many watts do I need in my home based transporter can lights to ensure success?

  16. 16
    The Tim says:

    By Scotsman @ 15:

    How many watts do I need in my home based transporter can lights to ensure success?

    Duh: One-point-twenty-one jigga-watts.

  17. 17
    Scotsman says:

    Phfffft. Engineers, always there with the answer. Will I have to change out my breakers or can I just jumper the 220V stove, waterheater, and well pump circuits?

    Back to DR. Shiller: here’s what he should have said, courtesy of ZeroHedge:

    “The multi-trillion problem is simply too massive to be manipulated and is also too large to be simply swept under the carpet for the next administration and generation. It is inevitable that the monster hiding in the closet will have to be addressed head on, and the sooner it happens, the less the eventual destruction of individual and societal net worth (however, it still would be massive). Delaying the inevitable at this point is not a viable option.”

    I’m certain Shiller feels somewhat constrained by his position and political considerations. And I can understand that he doesn’t want to feed an over correction in an emotionally driven population, but the sooner everyone stops pretending that trillions of dollars can be replaced and everyone’s fall cushioned, the sooner we can get back to building a future.

  18. 18
    VK says:

    Tim….you said:

    Although he declined to give any specific forecasts, the feeling I got from his comments were that Dr. Shiller believes home prices will return to their long-term, inflation-adjusted historical levels, both nationwide and even here in Seattle.

    I’m sorry if the following question sounds somewhat pedestrian…I’m not a real estate guru such as yourself and the other excellent posters you have on your site, so forgive me for asking what may be a stupid question…but, does the above statement imply (i.e., “historical levels”) normalcy in the housing market, or bubble-type prices?
    I’m not sure how ‘long-term’ is defined in the real estate world….5 years? 10? or more?

    Thanks for the good info.

  19. 19
    Ed says:

    I do NOT presume to be answering your question to Tim, but I suppose the meaning is:
    (i.e., “historical levels”) normalcy

    The last chart here
    and the two charts here
    are relevant.

  20. 20
    David Losh says:

    The value of Real Estate is constant. Properties are worth what they can rent for. Rents are tied to the Consumer Price Index. Some properties have value based on location, amenities, and land use that are above rental value.

    Real Estate is a safe investment because if you buy five housing units when your are in your twenties on a thirty year fixed mortgage those properties will be paid off when you are in your fifties. You can retire with one housing unit to live in, one housing unit to pay taxes, and insurance, that leaves three housing units for living expenses.

    Rents keep pace with inflation. There may or may not be appreciation of the units them selves, but historically speaking there will be a 4% appreciation per year.

    Done deal set in stone that’s the way it is and has been. Speculation usually has to do with changes in land use. Buildings got taller, land use allowed for more density. Population growth, transportation, scarcity of an amenity, like water front, adds value.

    The idea of a futures market of Real Estate has been around forever. It would track population migration to job centers. Something has always come up, but it does seem that today there is a group think mentality and people can be convinced of anything.

  21. 21
    One Eyed Man says:

    RE: VK @ 18

    VK – The following may be helpful in addition to what Ed and David have said above. I think probably the simplest and perhaps best measure of normal historic housing price levels is given by the affordability index. If I recall correctly, a commonly used affordability index is the ratio of median home prices to median income. Tim occasionally posts the graph of this index for Seattle for about the last 15 or 20 years. Hopefully he’ll post it again for you or a link to it so you can see it. Again, if I recall correctly, the ratio has historically ran at about 2 (or perhaps a little under at times) up until the bubble started forming in about the 2002 through 2007 time frame. I think that it moved higher during that time period until median home prices reached about 3 times median income at the peak of the real estate market in mid 2007.

    Over the last 21 months, the index has decreased and is nearing approximately the 2003 level. Because markets often tend to over shoot both above and below the mean as they move through a full phase of a cycle, I think most people believe that housing prices will continue to fall below the historic norm over the next year or two. Again, I think most people probably think that a realistic (if hypothetical) price for a given piece of real estate is probably somewhere around what its price was in the 2001to 2003 time frame, adjusted for inflation. (Note that inflation was probably about 2% per year or less on average over the laxt 7 or 8 years.)

    Another thing to perhaps keep in mind is that people commonly borrow money to buy real estate, and interests rates are therefore important to any true measure of affordability. Although 30 yr fixed mortgage rates have averaged about 6% over the last 7 or 8 years, the average over the last 30 or 40 years is probably closer to 8%. If interest rates go up substantially, the number for the affordability index should probably fall to offset it.

    The reason to use affordability as a historic measure of appropriate price is probably that it tends to relate to economic “fundamentals” (what it is reasonable for people to pay as a percentage of income) rather than to price speculation. Another measure of economic fundamentals would be to do a rent versus own analysis. David explained this to some degree above. This would calculate and compare the costs and benefits of renting vs. owning a particular house. That analysis is a little complicated and beyond the scope of what I can intelligably describe here.

    I hope the above explanation is helpful. As mentioned above, the numbers I stated are from memory and at best only approximate. If you have further questions, don’t hesitate to ask.

    Anybody feel free to correct me if I’ve got my head wedge up my, well you know, or the above explanation is otherwise in error or in need of refinement.

  22. 22
    The Tim says:

    By VK @ 18:

    …does the above statement imply (i.e., “historical levels”) normalcy in the housing market, or bubble-type prices?

    I’m not sure how ‘long-term’ is defined in the real estate world….5 years? 10? or more?

    My impression was that Dr. Shiller believes home prices will return to the baseline level seen post-depression through the early ’90s.

    Here’s a chart from the data on his site Irrational Exuberance:

    The 1950-1997 average HPI was around 112. In 2006 it reached a peak of 203, and has since declined to 137.

  23. 23
    David Losh says:

    RE: One Eyed Man @ 21

    Mortgages and interest rates have to do with pricing. Pricing is different from value as we all now know. In theory some one with a good thirty year fixed mortgage can buy at any price. The only thing that makes a difference is how quickly the loan can be amortized.

    The one thing that Doctor Schiller said, emphasis on doctor, is there would be no cash home priced futures market. It got a little laugh from the audience. In my opinion this is where he tipped his hand.

    If you were to manipulate the housing market you could do that by manipulating the mortgage market. We already have people believing that mortgages have something to do with value. Mortgages can only influence price.

    All rental income is based on owning the property free and clear. If your rental income is only servicing the debt then it’s useless. A goal would be to have cash flow during the paid down period, but as we discussed in another thread vacancy rate can destroy cash flow quickly.

  24. 24
    VK says:

    Tim, Ed, David, One Eyed Man, thanks to all of you for your very detailed responses. I have some background in economics but very little in real estate, so your responses are very insightful, and appreciated.

    Tim, you had a post a few weeks back asking others on your site when they thought the ‘bottom’ would be reached in the greater Seattle housing market. I remember many of the responses covered a wide spectrum. I think you reasoned sometime around December 2010, if I’m not mistaken…has anything changed recently to alter your feelings?

  25. 25
    Notorious ART says:

    RE: The Tim @ 7

    I’m so jealous! You got a picture with Prof. Shiller and I didn’t….

  26. 26
    The Tim says:

    RE: Notorious ART @ 25 – Yes well that’s what happens when you tag along with him all the way to his car :^) I am such a geek. Although he did ask me more about what is on the blog, so that was cool.

  27. 27

    […] Dr. Robert Shiller of the famous Case Shiller Home Price Index was in town yesterday.  Here are a couple of stories about his appearances.  This one is by Aubrey Cohen, the PI Journalist that attended class yesterday and here’s another one from SB. […]

  28. 28
    kfhoz says:

    Who is this CR who is linking? I tried, but that is Costa Rica.

  29. 29
    The Tim says:

    RE: kfhoz @ 28 – CR = Calculated Risk, a rather popular national economics blog.

  30. 30
    Notorious ART says:

    RE: The Tim @ 26

    I wanted one too, but I forgot to bring my camera. Oh, well, I’ll get one next time.

    You should use your picture with Prof. Shiller as your profile pic….

  31. 31
    Scott Weitz says:

    Did anyone else notice he dodged the question about what a ‘bottom’ may look like? He seems VERY skeptical about a recovery any time soon.

  32. 32

    […] Mass psychology could suddenly turn and drive up prices again (i.e. – Robert Shiller’s Animal Spirits) […]

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