ROBERT SHILLER: We May Be On The Verge Of A Revolution In The US Housing Market

The FT's Tracy Alloway and Anjili Raval reported yesterday on the "novel security" Blackstone is launching this week that will be backed by revenue from the thousands of foreclosed homes the private equity firm has been purchasing and converting into rental properties.

We reached out to newly minted Nobel Prize winner and housing markets guru Robert Shiller for his opinion - he Tweeted about the story earlier today saying it could "mark a revolution."

Shiller responded by saying that he thinks they could make housing markets more efficient - or in other words, more reflective of actual information:

I am excited to hear about this new possibility. As you may know, Karl Case and I, with S&P, worked with the Chicago Mercantile Exchange in 2006 to launch futures contracts on single-family homes. That contract is still going today, though weakly, see homepricefutures.com, a site maintained by John Dolan.

My first thought is that this securitization might develop the markets further, and that the two markets might support each other. A problem with our home price futures is that there is no cash market that one could use to hedge the risks of maintaining a futures market. This problem may now be corrected.

On a deeper level, regardless of its impact on the futures market, if the REO to rental securities take hold, and become liquid, it may increase the efficiency of the market for single family homes. That market has been extraordinarily inefficient, as Case and I showed in an American Economic Review article 25 years ago. Momentum persists for years. That would all change if professionals could really play a liquid market, and did so on a large scale.

On the other hand, there may be difficulties actually finding a market for these securities, as there was for the securitization of shared appreciation mortgages (SAM) in the 1990s.

Those SAM mortgages occurred when a lender agreed to receive a lower interest rate in exchange for a percentage of the appreciation of the house at the time of sale. They failed to catch on because, when they were first proposed in the U.S. in the late 90's, no one was worried about price declines, according to Harvard Business School's Robin Greenwood and Luis Viceira.

But given that Shiller has recently said he's starting to see signs of another bubble, it may be in everyone's interest to increase efficiency as soon as possible.