Shiller: House Price Decline Could Be Worse than Depression
Shiller's main points:
• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.
• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).
• The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.
Source:
U.S. House Price Decline Could Be Worse than Great Depression, Economist Shiller Says
Henry Blodget
Yahoo Tech Ticker, Sep 04, 2008 01:36pm EDT
http://finance.yahoo.com/tech-ticker/article/53094/U.S.-House-Price-Decline-Could-Be-Worse-than-Great-Depression#
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Comments
I think that most people STILL believe that housing is a GREAT investment. I honestly believe that we will not see the bottom of this until at least half say 'Screw it, housing is a losing proposition.'
That would be the official end of the irrational exuberance, at least in that asset class...
HCF
Posted by: HCF | Sep 5, 2008 12:40:29 AM
..and America will be a better place when homes become affordable once more because
1. People will stop focusing on the value of their homes as a measure of successs and get back to work!
2. We will relearn the lesson of our grandfathers----all good things come from hard work, thrift, selflessness, and common sense- not paper profit!
3. The top financial minds in the world will move on to something more productive than trying to figure out how to cleverly slice and dice mortgages in to "tranched-CDO-derrivative-swap-monster" thingys...
4. Young families will now be able to exeprience the American Dream without having to become slaves to a mortgage payment that eats up 70% of their income!!!!!
Falling home values may become synonomous with rising American values....hey folks, don't forget to vote!
Posted by: Rich Shinnick | Sep 5, 2008 12:50:57 AM
As to Shiller's third point, past history would indicate that the recovery after a housing bust is slow and gradual. The comment that, "And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.", is speculative and not supported as far as I can see by any data. In fact, since it is forward looking, it is impossible to support unless he is drawing straight lines based on prior periods.
Posted by: Tom Lindmark | Sep 5, 2008 12:53:46 AM
Wherever the bottom in housing will be, there is an ineluctable fact: house prices must be aligned to incomes.
Since incomes are not permitted to rise (Right Janet Yellen et al? That is what you want, right?) house prices must come down, or there isn't a buyer on the horizon.
Of course, I won't mention credit since it is barely available to ordinary folks who'd like to buy a house anyway.
Posted by: Francois | Sep 5, 2008 2:32:01 AM
The idea that "House Price Decline Could Be Worse than Depression" is not necessarily relevant per se. Prior to the Great Depression, was there a nationwide housing bubble (that is, outside of Florida), and if so, how big was it? Without at least some sort of a bubble then, comparisons to today's real estate price action might not be meaningful. Today, the problem is not that housing prices are falling, but that prices went up so far in the first place.
Posted by: John | Sep 5, 2008 2:47:10 AM
Finally, you are with the program.....
Global Depression MEME.
Oh!!!! the Breadlines, and the Hobo's jumping the Boxcars......
It's going to be Terrible
Riding east-bound freight train, stealing through the night
He was just a lonesome hobo who was fighting for his life
The sadness in his eyes revealed the torture of his soul
as he raised a weak and weary hand to brush away the cold.
Posted by: Eric Davis | Sep 5, 2008 2:55:03 AM
""And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.", is speculative and not supported as far as I can see by any data."
Exactly what's so "speculative" about this statement? If house prices "stabilize" (don't go higher) in nominal terms, and inflation is a number greater than 0% (which it has been since the Fed was created back in 1913, barring the Great Depression), loanowners--pardon me-- "homeowners" will lose out to inflation. Nothing unreasonable in there to me.
Posted by: HARM | Sep 5, 2008 3:28:47 AM
to point #3, as heard above, the only 'V-shaped' recovery in house prices will be in nominal terms, only..
same applies to 'stock' prices..
it's a Credit World, and Credit is broken..
Posted by: Mark E Hoffer | Sep 5, 2008 6:13:39 AM
The historical returns on housing are not good.
Shiller's point that real house prices are unchanged for a hundred years means, that where ever they end up, from there, the odds are that they "don't go higher" in nominal terms is a guess based on the historical data that they usually don't.
Homeownership is an expensive, cultural behavior. The weakened mortgage market, high commission plus other switching costs, and "underwater" positions only make the market less efficient. A less efficient market will not "correct" as easily. The government should focus on making the market fluid, not putting "a floor" under prices.
But the worst thing the gov't could do is take the WSJ Holman Jenkins' advice and bulldoze homes.
Today's high inventory means that lenders have less security (sorry about that.) But more homes means more, cheaper, places for people to live until will fill them up. That will put money in the pockets of consumers, like a tax cut.
Posted by: VennData | Sep 5, 2008 6:29:19 AM
Dear Dr. Bernanke,
You have a problem I may be able to help with. I make 40,000/year, and have a $500,000 mortgage on a $200,000 house. So do my neighbors. If something were to happen to those mortgages, well, you wouldn't want anything to happen to those mortgages, would you?
So I have a proposal. I was thinking that you could fly your helicopter over my house and drop a billion dollars into my yard. I could settle up with my bank on my house and the house next door, buy a new SUV down at the Ford dealer, and take the family on a shopping spree at Best Buy. No fear of my mortgage going in to default!
I'm sure your printing presses can print up the 100 Trillion or so it would take. Think of all the help that would be to the American consumer. USA! USA! USA!
Regards,
A Citizen
Posted by: pmorrisonfl | Sep 5, 2008 6:36:23 AM
The old: "It aint over until its over."
Posted by: JustinTheSkeptic | Sep 5, 2008 7:18:56 AM
Housing prices seem to drift down for at least as long as they go up. So, if the last upswing started in 1996 and ended in 2006, the next upswing should start in 2017. Depending on location.
Posted by: Tom | Sep 5, 2008 7:57:08 AM
"We're all ridin' on the D train...."
Posted by: leftback | Sep 5, 2008 10:17:03 AM
This is from the BEA's website:
Personal saving -- DPI less personal outlays -- was $133.8 billion in July, compared with $272.9billion in June. Personal saving as a percentage of disposable personal income was 1.2 percent in July, compared with 2.5 percent in June. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home
equity loans), by selling investments or other assets, or by using savings from previous periods.
I'd posit that the savings from current income must trend positive before the housing market recovers nationwide. With banks tightening lending a homebuyer must have savings for a down payment. In my opinion that down payment would come from current savings rather than in the form of a gift.
Posted by: bonghiteric | Sep 5, 2008 10:41:04 AM
So should folks not buy now and just ride out the storm for a few years or only go in if they can get a house for 10-20% under asking price? Or does someone try and stay in the 3 to 3.5x earnings area. Do any of the old rules still apply?
Posted by: montaigne | Sep 5, 2008 10:59:23 AM
When I see Barry on a breadline, I'll know we're in a Depression. Until then fairly happy days are here again.
Posted by: Dave | Sep 5, 2008 11:19:06 AM
Home price declines are already approaching those in the Great Depression, when they plunged 30% ... With prices already down almost 20%, it's not a stretch to think we might exceed that...
I'm curious what other bases for these similarities might exist: Was there a similar speculation in commercial and residential property in the 1920's leading up to the depression? Concurrently, was there an inflation in sales prices of single-family homes? Did financing for homebuyers (similar to low & no-downs) exist, which left homeowners with little equity and banks with large outstanding balances when foreclosures occurred?
Love to see some historical comparative data along those lines (As an Irish friend of mine observes, "Ah, you're just a slut for the data").
Posted by: Mongo | Sep 5, 2008 12:36:54 PM
I am in total agreement, I have been following this blog for quite a while and I have found it to be such a useful resource. I run a blog for real estate on Long Island and I the data there agrees that we already have had a 18% to 20% drop and we could easily see another 10 % before it is all over.
www.longislandrealestateguru.com
Posted by: Richard Halloran | Sep 5, 2008 1:43:29 PM
I don't think inflation really hurts homeowner that much. It may even help.
If the inflation is the enemy of those on fixed income (old cliche but true) then it must be the friend of those on fixed payments, right? What's mortgage? Mostly, a fixed payment. Add the fact that the amount of debt is fixed in nominal terms and not indexed and I think that inflation could be a help to housing reovery, not a hinderance.
Total disaster for the rest of the economy if it get's out of control but not so much for housing (at least for those who already have a mortgage at current fixed rates).
Posted by: Inflationscoming | Sep 5, 2008 3:18:13 PM
Richard,
I think you're smoking crack.
Really, only 10% down?
Pray tell, did you see this collapse coming? What makes you think only 10% in your area?
As near as I can tell, LI is screwed bigtime. The only thing selling is already off 30% peak and trending lower FAST! You should know, you're a broker!
Chuck Ponzi
Posted by: Chuck Ponzi | Sep 5, 2008 3:19:17 PM
I read all the other entries and there's one point not really spoken about. When you think of the easy credit extended to housing over the last few years you can see that housing really did not appreciate in value, it just inflated in dollars.
Prof. Schiller states that when you adjust for inflation, homes have not changed in value over the past 100 years or so. This is similar to an explanation I heard about an ounce of gold ($20 gold coin) being able to buy you a nice suit and some extras 100 years ago. Guess what, it can still do that today, but $20 bill can not.
All along we've been thinking the dollar was stable as a measure of "value." We thought that due to scarcity and a long list of other reasons, housing was going up in value. Well, it was the other way around! The home (i.e. the ounce of gold) has remained steady in value, its just our paper money that's been going up and down and now to hell in a hand basket.
When we finally decided to remove the dollar spigot (i.e. sub-prime,...etc) off housing the dollar regained some of its value in terms of home prices. Since the home values were so inflated, they will continue to fall, and fall, past the 10% stated here, and in particular CA, FL, NV, AZ, et. al.
Posted by: REO Guru | Sep 5, 2008 7:08:05 PM
HCF.... you have no clue do you?
another lamebrain BS post! babbling BS!
Posted by: sierra | Sep 6, 2008 12:34:57 AM
people forget that MANY houses and condos have been built for fast money have just come on the market, and sitting empty-there are also tons of condos and houses still under construction where the contracts to build were signed before the downturn, and even now MUCH LAND IS BEING CLEARED FOR NEW CONDO, HOME and RETAIL SPACE-
there will be a 5 -10 years housing excess-and the worst part-they wont be worth anything
Posted by: Mark | Sep 6, 2008 1:53:13 AM
I think the last poster was right: even now as I write this, thier are hundreds even thousands of condos and homes left empty in my city of Austin texas, yet new homes are STILL under construction, it's amazing that the financiers and builders of these current projects dont' "see the forest through the trees", these residences will be empty, thier are not enougf people with here in the city with sufficent incomes to purchase or even rent these new properties. It will take a decade for this situation to correct itself, until then rents & home prices and all manor of real estate assets will be depressed and undervalued. I'm glad I've got a fixed mortage !.
Posted by: Charles Hoyenski | Sep 6, 2008 4:08:15 AM
The problem will never be explained correctly because it involves the perversion of socialism. The foundations of the housing racket were based on greedy socialists that wanted anyone they could get their hands on buying a house and paying local property taxes on those houses. That is why Sally coffee shop worker that earned 20K per year was allowed to acquire a mortgage for 300K on a house that would be impossible for her to afford, as an example. No money down, variable rate interest loans with spikes of 4 - 5 %, the deluded that believed they could buy/sell at will for profit regardless of market conditions, the jokers building $350 million dollar high schools and then throwing the bond debt on local homeowners with impunity and in an undemocratic way, well, it is the recipe for revolution.
The key to the con though was making it easy for the conned to pull equity out of these properties, thus masking the real nefarious nature of the housing Ponzi problem. This mess will take decades, not years, to fix.
Posted by: Capitalist | Sep 6, 2008 7:09:03 AM
