'Green shoots could easily reverse'

The rise in mortgage rates in the US is a worrying trend, as it hinders investment and creates problems for potential home buyers. Noted economist Robert Shiller, who lends his name to the S&P Case-Shiller Index, feels the increase is affecting home sales.

Professor Shiller, who teaches at Yale University and wrote the classic 'Irrational Exuberance' in 2000, told ET Now that predicting the direction of longer-term rates is very difficult.

How much of an impact does rising mortgage rates have on consumers?

Well, I think, there is a big psychological impact because people see these rising rates as a sign of trouble. That the govt is borrowing heavily and now the borrowing rates are going up. It also has an impact on people���s willingness to buy homes. And the oil price is the most significant down news offsetting this green shoot news

Do you expect rates to keep rising?

I think, it's very hard to predict long-term interest rates. I think, recent rates are driven by concerns over heavy US borrowing levels. But we're getting reassurance, we are seeing the FOMC meeting, and we���re seeing people discuss exit strategies. So, I don't see any reason to think, at this moment, that they will continue to rise.

At what point would they be damaging to the economy?

Well, it's a matter of degree. The harder they go, the worse it gets. But my view about interest rates and real estate prices particularly is that the connection isn't as strong as most people think.

We had a boom in home prices in the 1970s, when interest rates were in double-digit ranges. So, it���s not one to one, between interest rates and home prices, or even the whole economy.

What's your take on the green shoots theory, especially with Tuesday���s housing data?

The metaphor sounds encouraging. It sounds like spring is here. And when spring starts, you know, it's gonna keep going. But the problem is a lot of these green shoots that we see could easily reverse themselves. Notably confidence, we've seen a surge in confidence.

I wrote a book about it called Animal Spirits, that's what drives the economy. But part of our book is that these things jump around and they can go right back down if we get other bad news. It's not really a green shoots phenomenon. Good things are here. Things blown in on the wind are looking good at the moment.