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Shiller: Oil prices could shift market psychology

Will oil's freefall trigger 'animal spirits?'

Oil prices have a big impact on market and consumer psychology, and it's difficult to predict how the plunging cost of crude will ultimately affect how Americans think about the economy, Nobel-winning economist Robert Shiller told CNBC on Wednesday.

"Historically business cycles have been associated with oil prices. The '73, '74 recession was an oil price spike; '79, '80—these are the big recessions of our time, " he said in a "Squawk Box" interview.

The country's shale oil boom has lifted spirits, and the perception that the industry is losing steam could dent confidence, he said.

In recent weeks, energy companies have begun reducing capital expenditure budgets for 2015 and started taking rigs offline at oil fields around the country. The energy sector accounts for about 35 percent of capital expenditures in the S&P 500.

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However, the lower price at the pump could help the housing market in remote suburbs, which has not been faring well lately, Shiller said.

Another tailwind for the housing industry is the 30-year U.S. treasurys yield, which is near record lows, he said. The boom in the housing market was precipitated by record low 30-year yields, he added.

On Wednesday, the Mortgage Bankers Association reported that mortgage applications posted their biggest increase in six years last week. Total volume spiked 49.1 percent from the previous week on a seasonally adjusted basis.