Robert J. Shiller, economist, Sterling professor of economics at Yale and co-founder of Case Shiller Home Price Index, says the three major US markets all show signs of severe overpricing

A First – All Three Major Markets in US  Simultaneously Overpriced

According to Robert J. Shiller, an economist and co-founder of the Case Shiller Home Price Index which is foundational to the housing industry, all three major asset markets in the US (stocks, bonds and housing), are all extremely overpriced.  This is the first time ever that all three of these markets have been simultaneously “this overpriced” in history.

Shiller wrote in a New York Times editorial recently that whether or not all three of these markets will continue to rise in the short-term is impossible to predict, however, Shiller advises all investors to be “cautious.”

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Trifecta of High Prices

Shiller pointed specifically at the stock market, the bond market and the housing market.  Here’s what he had to say about each:

  • Stocks: Shiller reminded us that the US stock market has been elevated for years and, despite that, the stock market continues to rise.  In a valuation measure Shilling helped create, the cyclically adjusted price earnings (CAPE) ratio now stands (at 37.1, the second highest ratio ever.  The average CAPE is 17.2.  (The CAPE ratio is defined as the real share price divided by the 10-year average of real earnings/share.)
  • Bonds: 10-year treasury yield has been on running on a down cycle for 40 years, according to Shiller. (Bond prices and yield prices run in opposite directions.)  The yield for bonds continues to be low and prices, based on historical comparisons, are running high.
  • Real Estate: Shiller quotes the S&P CoreLogic Case-Shiller National Home Price Index (NHPI), another of his co-creations, as increasing +17.7% in July, the highest y/y increase since 1975.  Based on this NHPI, Shiller indicated real home prices across the country have jumped +71% since February 2012.  He believes this home price increase is a “strong incentive to build more houses,” which would in turn bring down home prices.  Shiller indicates that the price-to-construction cost ratio, based on the Engineering News Record Building Cost Index, is just slightly off the all-time high hit at the peak of the housing bubble right before the 2007-09 recession.

Market Timing “Important”

Shiller presents various scenarios as to why pricing is so high in all three major asset markets right now.  The only scenario he really trusts is the scenario based on data… and data “…suggests that there is an increased risk of declines over periods of a decade or more.”

Shiller’s words to the wise: “Timing is important, yet it’s impossible to time markets reliably.  It would be prudent, under these circumstances, for investors to make sure their holdings are thoroughly diversified and to focus on less highly valued sectors within broad asset classes that are already highly priced.”

Thanks to Robert J. Shiller and The New York Times.




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