The U.S. housing market has yet to find a strong foothold to stage a sustainable recovery since it collapsed under the weight of the credit crisis of 2008, and unemployment remains at the core of the problem, Yale Economics Prof. Robert Shiller says.

Shiller—one of the minds behind the national S&P/Case-Shiller Home Price Indexes—told IndexUniverse’s managing editor Olivier Ludwig on the sidelines of the Inside ETFs conference in Florida that there are positive signs, even if faint, and that U.S. ingenuity could unlock the next chapter of prosperity.

Ludwig: Let’s start by talking about the U.S. housing market. You’ve spoken at great length about how it is holding back the recovery because people are underwater and they can’t up and move and go, say, to Santa Fe for a cool job. To what extent do you see a bottom here? Or are we not near there?

Prof. Shiller: Our S&P/Case-Shiller numbers have been falling with the latest data, but there are some positive signs. The most notable positive sign to me is the National Association of Home Builders Housing Market Index, which is a survey of their members. They have traffic of potential homebuyers, such as people who are looking at model houses and the like, and that’s sharply up in the last few months.

Ludwig: That’s telling us we are getting demand back?

Shiller: I say it’s sharply up, but it’s not up. It’s still at a low level. But that’s the most dramatic thing that’s happening right now. If you look at permits, they’ve been going up for the better part of a year now, but very weakly, and still at a very low level. And starts are kind of ambiguous.

Ludwig: How does the whole “underwater” problem fit into this phenomenon?

Shiller: Well, we have many millions underwater on their mortgages and there’s still a negative psychology that inhibits homebuyers. The housing market index I mentioned is up, but it’s not up a lot. You have to hope there’s a turn upwards, otherwise people are still worried about jobs; worried about security; they are not anxious to buy a house.

Ludwig: How about new household formation? That was a variable that you were expressing concern about going back some six months now. Young kids are coming back from college and still living with their parents.

Shiller: Household formation is even broader than that because it includes people renting a household as well. So people are not moving out of their parents’ or they are not immigrating here as much.

There is a sense that America has lost its “oomph” or something like that, and you can see that in the presidential election campaign rhetoric. That’s holding people back.

Ludwig: What about immigration? Greenspan used to talk about that at length as one of the reasons why he was fundamentally optimistic about housing.

Shiller: In California, where low-income immigrants were higher in number, that’s more important than the rest of the country. We saw the bottom tier of housing going up more, so that’s a sign that that was a factor. But the big problem is the unemployment rate, which has come down, but the decline is slow.

The employment-population ratio is at 58.5 percent with the December data. It had been as high as almost 65 percent. It has come way down and it’s close to its bottom. It has not come up very much at all. We are also seeing the unemployment rate come down because job seekers are getting discouraged and dropping out of the labor force.

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