Finding a Fix for the Housing Crisis
Finding a Fix for the Housing Market Robert Shiller, Real Estate Connect, January 7, 2008
Robert J. Shiller Chief Economist & Co-Founder of MacroMarkets LLC Arthur M. Okun Professor of Economics, Cowles Foundation Professor of Finance, Yale University Research Associate, National Bureau of Economic Research 1 Copyright 2009 | MacroMarkets LLC copyright 2008
Finding a Fix for the Housing Crisis Disclaimers The information contained herein does not constitute either an offer to sell or the solicitation of an offer to buy any security referred to herein. Offers to sell and solicitations to buy securities described herein will be made only pursuant to an offering circular registered with the Securities Exchange Commission or pursuant to private offering memorandum, that is, in each case, delivered to the offeree. Information contained herein does not purport to be complete and is subject to various qualifications and based on various assumptions, not all of which may be set forth fully herein. The information contained herein is subject to change without notice, its accuracy is not guaranteed and it may be incomplete or abbreviated. The MACRO® securities, or other securities referenced herein, will be more fully described in an offering memorandum or prospectus prepared by the issuers of such MACRO securities or other securities when such securities are being offered. The MACRO securities will be offered and sold only pursuant to such an offering document, which will be delivered to any prospective investors and which must be reviewed by them prior to making a purchase of any securities therein offered. Any information set forth herein is subject to change without notice and will be superseded by any amendments to or subsequent versions of these web pages, and any offering document for the MACRO securities or other securities referenced herein. These materials may contain "forward-looking statements," including projections, forecasts and estimates. These forward-looking statements are based upon certain assumptions. Actual events are difficult to predict and may differ from those assumed herein. Accordingly, there can be no assurance that the estimated returns or outcomes described herein can be realized, that the factual assumptions upon which forward-looking statements are based will materialize or that actual results will not be materially different than those presented herein. “Standard & Poor’s” and “S&P” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by MacroMarkets LLC. None of the financial products described herein that are based upon one or more S&P/Case-Shiller Home Price Indices are sponsored, endorsed, sold or promoted by S&P, and S&P makes no representation regarding the advisability of investing in such products.
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Finding a Fix for the Housing Crisis
“This is another Fine Mess, Stanley” • • • •
Rare events Complacency Conventional Wisdom Respect for sophisticated methods rather than substantial evidence • Herd behavior and self censorship • Irving Janis, Groupthink, 1972 3 copyright 2008
Finding a Fix for the Housing Crisis
Real S&P Composite Stock Price Index and Real Earnings 2000 1800 1600 1400 1200 1000 800 600 400 200 0 1870
450 400 350 300 250
Price
200 -51% from 2000 peak
150 100
Real S&P Composite Earnings
Real S&P 500 Stock Price Index
(Jan 1871-Dec 2008)
50 Earnings 1890
1910
1930
1950
1970
1990
0
2010
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Finding a Fix for the Housing Crisis
Price Earnings Ratio (10-Year Avg Earnings) Jan 1881 – Dec 2008 20
50 2000 1981
40
Price Earnings Ratio
18 16
35
14
30
12
25
1901 Price-Earnings Ratio
1966
10 8
20 15
6
1921
15.2
10 5 0 1860
Long-Term Interest Rates
1880
1900
4
Long Term Interest Rates
45
2 1920
1940 Year
1960
1980
2000
0 2020
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06/20/08
06/14/05
06/07/02
05/27/99
05/22/96
05/20/93
05/18/90
05/18/87
05/14/84
05/13/81
05/10/78
05/07/75
05/01/72
04/30/69
03/14/66
03/07/63
02/29/60
02/21/57
02/16/54
04/04/51
07/27/48
11/19/45
04/21/43
10/09/40
04/04/38
09/19/35
02/25/33
08/13/30
01/13/28
Finding a Fix for the Housing Crisis
Volatility 1928-2008
Stock Market Volatility Daily Jan 13 1928 to Oct 29, 2008 Daily Lagging 30-Day Stdev of One-Day S&P Composite Percent Changes
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Finding a Fix for the Housing Crisis
US Home Prices 1890 to 2008 Q3 With Annual Building Costs, Population, Ten-Year Treasury Yield 1000
250
900
Index or Interest Rate
700 600
150 Home Prices
500
100
400 300
Building Costs
Population in Millions
800
200
Population 50
200 Interest Rates
0 1880
1900
1920
1940
1960
1980
2000
100 0 2020
Year
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San Francisco Real Home Prices Jan 1987-Oct 2008 (S&P/Case-Shiller) 200 180 160 140 120 100 80 60 40 20 0 1985
1990
1995
2000
2005
2010 8
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Finding a Fix for the Housing Crisis
San Francisco Real Home Prices For Low, Middle and High-Priced Homes Jan 1987-Oct 2008 (S&P/Case-Shiller) 250
200
150
Low Middle High
100
50
0 1985
1990
1995
2000
2005
2010
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New York Commuter Real Home Prices For Low, Middle and High-Priced Homes Jan 1987-Oct 2008 (S&P/Case-Shiller) 250
200
150
Low Middle High
100
50
0 1985
1990
1995
2000
2005
2010
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Finding a Fix for the Housing Crisis
Miami Real Home Prices For Low, Middle and High-Priced Homes Jan 1987-Oct 2008 (S&P/Case-Shiller) 300 250 200 Low 150
Middle High
100 50 0 1985
1990
1995
2000
2005
2010
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Inflation Adjusted Japanese Real Estate Performance 100 80 60 40 20 2006
2002
1998
1994
1990
1986
1982
1978
1974
1970
0
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Real Home Prices in London and Greater Boston 1983-2008 Real Price Index
(Halifax & S&P/Case-Shiller with Inflation Correction)
400 300
London
200 100
Boston
0 1980
2000
2020
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Finding a Fix for the Housing Crisis
Sources of the Bubbles (R. Shiller Irrational Exuberance 2000, 2005) • • • •
Precipitating factors Amplification mechanisms Cultural factors Psychological factors
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Finding a Fix for the Housing Crisis
Short-Run Solutions • Need to stabilize the economy with twin targets: a fiscal target and a credit target – Expansionary fiscal policy of at least the $775 billion envisioned by the Obama team – Continuation of Term Auction facility (TAF, Dec 2007), Term Securities Lending Facility (TSLF, March 2008), Primary Dealers Credit Facility (PDCF, March 2008), Commercial Paper Funding Facility (Oct 2008) Term Asset Backed Securities Loan Facility (TALF, Nov, 2008) at even higher levels – Possible further government conservatorships like those given Fannie and Freddie
• Reduce the foreclosure problem with plans like that of John Geanakoplos or Sheila Bair 15 copyright 2008
Finding a Fix for the Housing Crisis
Long-Run Solutions • New information infrastructure • Comprehensive financial advice • New financial watchdog • Default-option financial planning • Improved financial disclosure • Improved financial databases • New system of economic units of measurement 16 copyright 2008
Finding a Fix for the Housing Crisis
Private Sector Solutions • Fundamentally expanding financial markets to cover more risks that really matter • Create products that provide the opportunity to hedge or invest in large, important asset classes • Level the playing field so that both institutions and retail investors alike can participate
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Finding a Fix for the Housing Crisis
Jan 6, 2009 Housing Futures Market East Cities (Tradition Financial Services)
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Finding a Fix for the Housing Crisis
January 6, 2009 Housing Futures Market West Cities (Tradition Financial Services)
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Finding a Fix for the Housing Crisis
MacroShares MacroShares were developed to provide hedging or investment opportunities for individuals and institutions for important economic risks (housing, oil, inflation, etc) MacroShares Currently Trading – $100 Oil Up – $100 Oil Down – (NYSE: UOY and DOY) MacroShares Recently Filed – Housing – Medical Inflation Transparent – NYSE listed, allowing for continuous buying and selling throughout the trading day No Credit risk – fully backed by U.S. Treasuries and Cash
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Accolades • MacroShares were recently named one of the best inventions of 2008 by Time Magazine • MacroShares have recently been featured in – US News and World Report – Bloomberg Magazine
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Finding a Fix for the Housing Crisis
Long-Run Solutions-Retail Products • Continuous Workout Mortgages • Home Equity Insurance • Livelihood Insurance
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Finding a Fix for the Housing Crisis
Continuous Workout Mortgages • Workout of mortgage conditioned on economic events is written into initial mortgage contract • Workout is continuous, happens every month as economic indicators change • In response to changes in home prices and to changes in income and employment • Index-based, reduces moral hazard
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Finding a Fix for the Housing Crisis
Why Does Innovation Take So Long? • Wheeled toys (Mexico Late Classic Period, between 650 and 950 A.D.) but no wheeled vehicles in pre-Columbian Americas • Wheeled suitcases, Bernard Sadow, 1972, Robert Plath 1991 • Movie subtitles invented in 1920 (Abraham Schomer, The Chamber Mystery) but virtually never used again in silent movies • Desks over exercise bikes—still not done (Mayo Clinic) (from New Financial Order, 2003) 24 copyright 2008
Finding a Fix for the Housing Crisis
For Additional Information
14 Main Street Madison, NJ 07940 United States 1 (888) MACROS-1 www.MacroMarkets.com
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