Legends Of Indexing: Robert Shiller

December 22, 2014


Do you think housing will continue its recovery? It looks like it has been slowing.
The last three months have been slow in our S&P/Case-Shiller Indexes, and in fact, negative on a seasonally adjusted basis, although I don't completely trust the seasonal adjustments—they might be a little bit too strong. The housing market has been growing ever since 2012. It is up almost 20 percent from the broad housing bottom in 2012, and in some cities, it's up more. In San Francisco, it's up two-thirds since its bottom in 2009. Those are big increases.

I have done another survey with questions about home buyer attitudes, and according to my research with Karl Case and Anne Thompson, our survey is showing that the tendency towards declining long-term expectations has been reversed. Ever since around 2005, people have been getting less and less optimistic about long-term home price growth, and it reached its lowest last year in 2013. But in a 2014 survey, it started to turn up again, although it's not a dramatic change.

It could be that the stock market will go up to even higher levels and the housing market will be carried along with that. On the other hand, the developing pessimistic stories might have the reverse effect.

What are your biggest concerns for investors right now?
Right now, everything looks a little overpriced. The stock market looks overpriced, the bond market looks overpriced. Housing is not clearly overpriced, and I'm especially unsure what it is going to do. It doesn't seem to me the best time to be an investor. Maybe my biggest concern right now is that many investors are not saving enough. They are blithely assuming the market will carry them forward. And this applies not only to individual investors but to managers of defined benefit pension plans—they might not be putting enough away for the future. The market may have a serious correction, so we could have a problem.

You always have an interesting take on indexing and where to take indexes next—home prices, health care prices. What other uses do you see for indexes in the current kind of environment?
I wrote a book on this 20 years ago called "Macro Markets," and that was the time when I was developing the home price indexes for trading. There is a futures market at the Chicago Mercantile Exchange for home prices based on those indexes. I also around that time started to work on labor income indexes, and I thought those should be traded too, so people could hedge their occupational risk. We had to create new indexes because the existing labor occupational income indexes are not really designed for trading.

I have been arguing now for 20 years that people should think seriously about indexes for trading. Another example is GDP, gross domestic product. That is published by the government, but it's not published with a mind for trading. They make revisions very slowly—they can do it five years later. There could be a better effort there. I also think we might want to develop trading in components of GDP, because different components mean different things. There could be a consumption-based market, for example.

And then there's also commercial real estate. There is already some over-the-counter trading of commercial real estate derivatives based on the International Property Databank indices. There are others who are working on developing alternative commercial property indexes—the Costar Commercial Real Estate indexes or the pure-play REIT commercial property indices developed by NAREIT and the MIT Center for Real Estate are some interesting examples. I haven't studied them in detail, but I can imagine they are useful and that could maybe still be improved further.

Anything that matters to people should be an index, should be traded. There is talk about national economic welfare, something that takes into account environmental costs—we could have a socially responsible GDP contract, something like that.

What do you see as the biggest positive or negative developments in the indexing space in the past 20 years or so?
Off the cuff, the thing is that it hasn't been developing as well as I had hoped. For example, we launched home price futures, and it hasn't taken off. CBOE launched a real estate contract too and then shut it down. They launched Consumer Price Index futures, and they shut those down. We do still have inflation-based index funds, so there is effectively a market for the Consumer Price Index, but not all the markets that we thought.

We have seen ETFs take off in the last 20 years, and that is encouraging. We have seen REITs take off, but even so, I wish the REITs indexes were more focused on kinds of real estate and geographical regions so that they could serve a hedging purpose. It seems like indexes are very important for hedging opportunities, but I think they should be developed much more.

What is the CAPE ratio telling you these days?
It's been quite high—it has been up to 26—but not anywhere close to record highs. The other side of it though is that the bond market—which is the natural alternative—and the money market are both yielding very low. They are very highly priced. It doesn't have the same exit signal that it would normally give. I don't see the need to pull completely out of the market right now. I am a little worried about the volatility we have seen recently, but you don't want to overreact to these things.

The story of slow global growth, as indicated by the IMF, is just not compelling enough. I don't see it at the present moment as the major worry.




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