Yale Professor of Economics Robert Shiller joins the Yahoo Finance Live panel to discuss the latest outlook for home prices.

Video Transcript

ADAM SHAPIRO: What do you take away from the data? What's it telling us?

ROBERT SHILLER: Well, this is a nationwide event, and it is a world event, to some extent. It's not just the US. Canada and other countries are showing a booming market-- the home price market. It's surprising the timing of this. It came-- starting in a recession in last year, a very brief recession-- COVID-19.

We're supposed to be depressed, and yet we seem to be exuberant in the market. It's not explained by any logical-- it is partly due to low interest rates, of course, and Fed policy. But it's so pervasive, I think it's not just that. I think that it has something to do with our psychology at this point in history with-- maybe emerging from a COVID-19 pandemic and not so sure about it.

ADAM SHAPIRO: Professor, if I may-- because I want to follow up with you-- but I think the question on a lot of people's minds here in the United States-- it's global, as you pointed out. But if you're a middle class person, are you going to be able to buy a house?

ROBERT SHILLER: Yes. Now, that, I think, is what I hear more than opportunity to make a killing investing in houses, it's FOMO. It's thinking that, yeah, it'll never come back, the opportunity. And it's at a time when we admire speculators or we aspire to be speculators, when there's a retail surge and interest in speculative markets, and people are motivated. It doesn't matter where you are in the United States, we have this excitement about speculative excesses.

And look, the idea that maybe it'll correct down, the narrative recently is that the last time this happened, it just generated new opportunities-- the last time prices corrected in either the stock or the real estate market. So people think, maybe I should get in. It's fuzzy thinking. It's not clear. No one has clarity.

But recently, we've been wanting to take action. We're feeling frustrated, our inability to deal with this risk of a deadly virus. We want to do something. And so that sometimes seems to be, let's upgrade our house or let's get into the stock market, even though it looks highly priced.

ADAM SHAPIRO: So-- but with what you've just said-- I heard you mentioned fear of missing out. I've heard you talk about speculation and low interest rates. Doesn't all of that, when you add it together, equal bubble?

ROBERT SHILLER: Yeah, the bubble metaphor is-- it dates from-- it was first used in 1720 during the Mississippi-- the stock market crash. They called that a bubble. But I think it's a little bit misleading as a metaphor because when bubbles burst, it's absolutely final. It's not coming back. But we're faced with the more ambiguous situation.

We have in memory declines in markets, but then they've generally been corrected up afterwards, both in stocks and in housing. And so people find it puzzling. They don't know what to do. I can't really time the market, but I feel anxious sitting here watching it just keep going up and up. And so eventually, people cave in and buy, and that's what drives it. It's an unstable situation.

ADAM SHAPIRO: I want to pick up with what you just said about an unstable situation. And I need to get to Phoenix. But before we get there, I want to ask you this question. If a young woman or man came to you and said, should I buy a house right now, what would you say to them?

ROBERT SHILLER: Yes, all right. Usually, the decision to buy a house is part of a lifestyle. It has to do with new babies and schools and things like that. But usually, there's pretty strong reason to do that or not do it at a given time. But if you actually look, yeah, I mean, the prices are soaring, and that just-- this is a record. The nearly 20% national increase that we saw this month is a record for our indexes. And it's a record going back-- there's some noise in the data before the 1920s, but it's practically a record for 100 years. And so people just feel, I can't just sit here and watch this. I have to do something. And so-- but if you have a family situation where you want to settle down, I would say maybe go ahead. I don't think we know what these markets will do with any great accuracy.

ADAM SHAPIRO: And the fact is, you have to have a roof over your head. But help us understand Phoenix. The year-over-year jump in the prices for homes in Phoenix, the month-over-month jump in Phoenix is pretty dramatic, and there's no water.

ROBERT SHILLER: Yeah.

ADAM SHAPIRO: What's behind that? I mean, there's no water. What drives this?

ROBERT SHILLER: Yeah. Well, remember, the last time we had a boom in home prices that peaked around 2005, 2006, Phoenix was a latecomer to that market, Phoenix and Las Vegas-- and to the boom. But they really got into it belatedly and had a big boom in prices back then. So I think there's something of a story to Phoenix. It's a beautiful place. People think of it as a destination after they retire. And sunshine puts you in a good mood. I don't know. Things like that are driving it where they did last time.

ADAM SHAPIRO: All right, so let me wrap up with this. We're expecting to see interest rates begin to go up with the Fed actually perhaps doing this next year. What impact will that have on the pace of price increases for housing?

ROBERT SHILLER: Well, historically, there is not as strong of a correlation between home prices and interest rates as you might think. It would be rational to suppose so. There is some. During the hyperinflation that we had around 1980, the home prices were very low, and construction of new houses was low. But I'm tending to think that the Fed is a stabilizer. I wouldn't think that they will be a cause of problems.

A bigger cause of problems will be new construction. You already see residential investments picking up. It hasn't quite come as high as it was during the peak in 2007, before the recession, but it's going up. And there's going to be a supply response, at least in cities that have available land and zoning restriction. And so we don't expect-- I don't expect the Fed to be-- I admire the Fed. They're a stabilizers. And I-- but there is a chance that we will see big declines in coming years. I think people are anxious about that at this point in history.