Higher interest rates can tip the housing market, Yale's Shiller warns

Turbulence is rocking the U.S. stock market as investors fear a strong economy will send interest rates higher. However Yale economics professor Robert Shiller said Thursday, while higher rates could tip the housing market the real issue is inflation.

“Obviously interest rates… it’s the price of time. It’s a fundamental factor in our economy. And people watch it. A lot of people think the stock market is overpriced, but what’s the alternative?” Shiller asked. “If you go into debt, it has not been a very good return either. But that’s all changing now and maybe that’s the new narrative.”

The Federal Reserve in January during its’ first policy meeting of 2018  left its benchmark interest rate unchanged in a range of 1.25 percent to 1.5 percent—citing continued job growth an stronger inflation and setting the stage for a rate hike in March.

Despite acclimation for a low interest rates, Shiller pointed out how homebuyers have gotten used to a no-inflation environment.

According to the latest employment report, wage growth rose 2.9% compared to the same period a year earlier. Investors fear the Federal Reserve might raise interest rates faster than anticipated due to stronger-than-expected wage growth data, which has caused the 10-year Treasury yield to rise to 2.85%. Increasing bond yields impact the housing market, as mortgage rates tend to follow the same path.

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But in Shiller’s opinion, the latest data isn’t “alarming.”

“That’s not necessarily inflationary,” Shiller said. “But if the economy stays full tilt as it has been, a pickup of inflation would not be a surprise and some people wouldn’t mind it so much.”