Shiller: Expect More Home Price Declines

In this NY Times op-ed, Yale economics professor and housing market guru Robert Shiller splashes some cold water on the recent housing market fervor in such places as Arizona.

Why Home Prices May Keep Falling
HOME prices in the United States have been falling for nearly three years, and the decline may well continue for some time.

Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.

Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient.

A national home price decline of 48 percent would imply a decline of, what, about 80 percent in Phoenix? That may be a very efficient and rational market.

He goes on to explain why home price declines go on for much longer than most people really understand, especially those who think they're snapping up such bargains today.

Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.

Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. First, many owners don’t have a speculator’s sense of urgency. And they don’t like shifting from being owners to renters, a process entailing lifestyle changes that can take years to effect.

Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.

In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This may involve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn.

This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting and predictable.

It used to be conventional wisdom that, unless you were financially strapped, once you became a homeowner you would forever be a homeowner. If you were transferred from one town to another, you'd put your house up for sale, go out to the new place, look around for a few days, buy a house, and move in.

That seems to be changing and one of the most important reasons is that people can't sell their existing houses - at least not at the price they want.

It will be interesting to see if the U.S. housing bust fundamentally changes the way Americans think about home ownership.

Comments

[Bjarne Jensen:]

I don't see any data to suggest that our economy is turning back around to where it creates real value, ie new wealth. Have you considered that without a substantive economic turnaround, we may look like Mexico in five years? Why won't the housing continue to plummet from here


On Jun 08 10:11 AM User 345523 wrote:

> Shiller should think about selling at the top himself. Doom and Gloom
> sales also have a finite shelve life. For whatever flaws in the information
> he likes to promote, he basically got it right. Housing was a big,
> fat, bubble. Now though, it's a lot less clear where it all heads.
> A little more off the top, sure, maybe, but we're not going to plummet
> from here. For the sake of preserving his ‘great prognosticator’
> role, he might do well to scale back his misery rhetoric.

Jun 08 10:30 AM

[ain't no fo...:]

Did I miss something? Are the 2+ million Option Arm and Alt-A loans that are underwater (many by a HUGE amount) and which are about to reset/recast over the next two years suddenly becoming eligible for below market rate refinancing because they're no longer underwater?

Are mortgage rates going DOWN now?

Is commercial lending on the mend? Is the CRE market coming out of its own recession?

Is there a strong and sustainable recovery in jobs now, such that a wave of new home buyers are going to come surging into the market?

Did we just rejuvenate our manufacturing base and bring about a large increase in high(er) paying jobs than the ones we have been seeing at Walmart and McDonalds the past 8 -10 years?

Has the American consumer retrieved his/her credit cards and now decided NOT to rebuild savings at the expense of DEBT?

I'm sorry, but I don't see the drivers for any meaningful recovery in the housing market for a long time to come... yes there are bottom fishers coming in and lowballing REO and foreclosed properties, thereby setting a temporary but very depressed floor in some areas, but there are a lot of foreclosures still coming on the market now that the moratoriums are over, and my conversations with family, friends, and associates don't indicate any new sense of hope or urgency for a quick return to prosperity, so I think I will continue to rent nicely furnished, well equipped, and incredibly inexpensive homes and condos for the time being... it is carefree and allows me the freedom to move with the weather and my personal priorities.

Jun 08 11:33 AM

[User 345523:]

whoa...Nancy Nay-sayer.
Correct me if I'm wrong, but this economy is still the largest in the world by some huge, huge, huge amount. We are generating economic output/activity at almost unprecedented rates relative to any point in man kind's existence.
Yes, unemployment is up 5 or 6% in the past year, GDP has turned negative yoy, but the core is still productive. Downturns happen. It’s not to be taken lightly, but housing prices relative to the change in the economy have been 10X worse. Like I said, maybe they go down more, but to think this order of magnitude happens again is to say prices we’re overvalued by 75%. I can’t find any reasonable argument for that. People will buy homes and sell them for scrap at that point.
So, my original sentiment stands. Shiller and all other doomsayers can talk about continued softness, but should consider amending the tone of the rhetoric. We’re not at the same point in the bubble so the “OMG” factor won’t be as dramatic. It’s about creditability from here that I’m speaking of.

Jun 08 02:10 PM

[htex:]

IMHO you haven't seen the product that will hit the market when property taxes go up to cover muni, county, state, school deficits. And, since the government is saving insolvent insurance companies and expecting them to survive (on property owners backs), policies are going up, up, up. Finally, interest rates will tick up (or maybe first interest rates will tick up) and three strikes...you're out.

Jun 08 03:51 PM

[Jeff:]

Dear wp dragon,
I hope you can see your way out of all your negativity to see the counter points that always exist.

2+ million Option Arm and Alt-A loans:
The Libor rate which these loans are tied to is way below where it was five years ago. Not all of these folks are speculators and can't pay the principal. The interest rate will actually decline for most of these folks. My 5 year interest only came up in February, and it was the same as five years ago, however, I refinanced a 7 year jumbo interest only with BofA at 4.78%, go figure.


Are mortgage rates going DOWN now?
Rates are currently at a 50 year low, my daughter just bought a condo and received a 30 year fixed rate loan for 4.65%, plus $8000,00 tax credit. She bought her condo for $265,000, it last sold for $440,000 three years ago. She could not have afforded the payment on $440,000 three years ago, but with the new low price, and 50 year low mortgage rates, plus the $8000,00, she is one happy camper....

Is commercial lending on the mend? Is the CRE market coming out of its own recession?
1.5 trillion TARF guarantee should support this market kindly.


Is there a strong and sustainable recovery in jobs now:
If you look at the charts you will see that job losses have declined markedly over the past 3 months, this is the same pattern as other recessions.

Did we just rejuvenate our manufacturing base:
Believe it or not, the United States manufactures 20% of the worlds good, more than China, and the majority of ours products are high ticket items, not consumer goods.

Has the American consumer retrieved his/her credit cards and now decided NOT to rebuild savings at the expense of DEBT?
The 92% of working folks are and will feel more secure as the rate of job loss decreases, and that 92% will continue and increase their spending.

If your store sold 20 items in 2007 and then only 5 in 2008, and then sold 10 in 2009, that's a 100% increase from 2008 levels, yet still down 50% from 2007. The stock market represents the 5 sold in 2008, and will increase with your 100% sales and profit increase.

Black or white. It's ain't all one way.

Jun 08 03:51 PM

[Fighting Yoda:]

Tilson and Tongue (co-founders of T2 and co-authors of the book “More Mortgage Meltdown,”) don't see housing bottoming until the middle of next year, and the recovery, they suggest, will be ‘conspicuous by its lack of vigor’.
One of the scarier charts in the report -- credit's current perilous condition -- lists how much each of the various types of loans is severely underwater- 73% of option ARMs, 50% of subprime, 45% of Alt-A and 25% of prime mortgages are in that uncomfortable category.

Don't forget Japan: Prices in the Tokyo area and in five other cities -- Kobe, Kyoto, Nagoya, Osaka and Yokohama -- sank 76 percent from 1990 through 2005. Residential real estate is still down 40%, and commercial 70% from peaks.

US 20 city index is only down 32% form 2006 peaks. It certainly can fall a lot more, and worse for a long time - several years before even some semblance of stability. Employment is not forecasted to stabilize till 2011 - housing will definitely lag.

Jun 08 05:52 PM

[Fred Voetsch:]

"It will be interesting to see if the U.S. housing bust fundamentally changes the way Americans think about home ownership."


I don't think there's any doubt it will and already has.

Excellent article.

Jun 08 08:41 PM

[ain't no fo...:]

Thanks for your comments Jeff. I'm sorry if my "negativity" was disconcerting to you. Actually, that "negativity" saved my sorry white a$$ the last two years, and kept me from jumping into the greatest asset deflation disaster in nearly a century... and it kept me from listening to hundreds upon hundreds of "to the Moon, Alice" permabulls who chirped along right into last Fall claiming "gee, everything is just swell... This is America and we ALWAYS win... what's a little weakness in a couple of housing developments to worry about?"

Heck, my net worth is actually higher now than on Feb 27, 2007 when I first got an inkling of what was happening, even with my nasty case of negativity... since then it has also kept me safe and sound and very liquid and very short term oriented and VERY suspicious of banks and governments bearing gifts (and the skepticism does so to this day, since I believe we are still deeply embedded in this collapse, albeit taking a neat little government sponsored "time-out" to rest up for the next phase).

I could go on and on about the story behind the numbers on employment, like U-6 being at 16.4%, and how many jobless are dropping off the back of the list, and how the average lengths of joblessness are skyrocketing, and about the Quality of jobs we are producing in this country, or about how its now really 83.6% of the people who are just chomping at the bit to go out and spend spend spend again, not your 94%, and how most of those 83.6% are NOT secure but just barely surviving financially, but I really don't want to waste either of our valuable time, and I expect by now your eyes are closed, your hands are over your ears and you're singing the Star Spangled Banner at the top of your lungs to drown out my "negativity".

Congrats on that great loan you got nearly 4 months ago. If you reread my previous comment, you may note that I phrased my question about mortgage rates in the NOW, not 4 months previous to now... and I dare you, no I double dare you, naw, I triple dare you to walk out the door tomorrow morning and get that swell jumbo deal at 4.78 again. Seems the long end of the curve is getting sold off hard (maybe being helped by our Chinese friends who are absolutely cowering at our manufacturing prowess, and we're only going to increase that output, eh?) and so they are plowing into the short end of the curve. Last I heard was Friday 30 year mortgages were up around 5.25 - ooops, there I go again with the mister negativity thingy again, and that in some areas the refi market locked down hard as soon at rates hit 5%... dang, I did it again!

Fact of the matter is, we are not gonna agree on much of anything here Jeff, and me being the suspicious, cynical and negative SOB that I am, that works just fine for me.


On Jun 08 03:51 PM Jeff wrote:

> Dear wp dragon,
> I hope you can see your way out of all your negativity to see the
> counter points that always exist.
>
> 2+ million Option Arm and Alt-A loans:
> The Libor rate which these loans are tied to is way below where it
> was five years ago. Not all of these folks are speculators and can't
> pay the principal. The interest rate will actually decline for most
> of these folks. My 5 year interest only came up in February, and
> it was the same as five years ago, however, I refinanced a 7 year
> jumbo interest only with BofA at 4.78%, go figure.
>
>
> Are mortgage rates going DOWN now?
> Rates are currently at a 50 year low, my daughter just bought a condo
> and received a 30 year fixed rate loan for 4.65%, plus $8000,00 tax
> credit. She bought her condo for $265,000, it last sold for $440,000
> three years ago. She could not have afforded the payment on $440,000
> three years ago, but with the new low price, and 50 year low mortgage
> rates, plus the $8000,00, she is one happy camper....
>
> Is commercial lending on the mend? Is the CRE market coming out of
> its own recession?
> 1.5 trillion TARF guarantee should support this market kindly.<br/>
>
>
> Is there a strong and sustainable recovery in jobs now:
> If you look at the charts you will see that job losses have declined
> markedly over the past 3 months, this is the same pattern as other
> recessions.
>
> Did we just rejuvenate our manufacturing base:
> Believe it or not, the United States manufactures 20% of the worlds
> good, more than China, and the majority of ours products are high
> ticket items, not consumer goods.
>
> Has the American consumer retrieved his/her credit cards and now
> decided NOT to rebuild savings at the expense of DEBT?
> The 92% of working folks are and will feel more secure as the rate
> of job loss decreases, and that 92% will continue and increase their
> spending.
>
> If your store sold 20 items in 2007 and then only 5 in 2008, and
> then sold 10 in 2009, that's a 100% increase from 2008 levels, yet
> still down 50% from 2007. The stock market represents the 5 sold
> in 2008, and will increase with your 100% sales and profit increase.
>
>
> Black or white. It's ain't all one way.

Jun 08 09:33 PM

[Jeff:]

Where can I get some guns and find a bunker!!!!!!!!

Jun 09 12:32 AM

[cameroni:]

Gun-shops and "Bunkers-R-Us" of course Jeff.

Jun 09 01:07 AM

[cameroni:]

Where I live I have noticed an increase in the numbers of rentals, a general (though small) decrease in price and an increase in the frequency of moves amongst people I know. They are moving up. That is, they are able to afford better accommodations cheaper in this market and what that tells me is that landlords are being squeezed and are subsidizing rents.

Renting is a not just a good option for the moment, it is the preferred alternative to ownership. It does not carry any of the risks of municipal tax hikes, rising interest rates, deflating property values or escalating costs for materials and maintenance brought on by the commodities surge. And if you don't like the landlord or his rent you can just pack up and move to a better priced alternative. That gives you freedom.

Rent well and save your money.

Jun 09 01:26 AM

[Perki:]

Yes, real estate prices will keep dropping ( see Japan) and the banks are no more solvent than they were before the disclosure rules were changed ( also see Japan ).

Jun 09 07:40 AM

[ain't no fo...:]

ssshhhh, cameroni, don't advertise that!!!!

I've been renting nicely furnished condos for two years now. I rented on a beach in FL for 7 months the past two years, and on the side of a ski mountain in Vermont for 5 months the past two summers.

These are fully furnished and always include cable... usually also they include either local phone or electric, and heat is usually included. There is no condo fee, no yard or internal maintenance cost, no property taxes, no insurance costs, no repair costs... usually my only bills are for rent, DSL, and maybe electric. PERIOD.

My rent for a 2BR/2BA on the beach was $1000/mo this past winter. My rent for a 2BR/2BA on the mountain is $800/mo.

All of my possessions fit in my car. It takes two days/one night to make the trip - less than $200 typically, and my PC is set up and connected the same day I arrive usually.

And like you said, if I don't like the landlord or the neighbors, I just go somewhere else the next year... with craigslist there are almost too many such properties being advertised to choose from.

I absolutely cannot think of a better way to live, at least for now.

So, ssshhhh.....

On Jun 09 01:26 AM cameroni wrote:

> Where I live I have noticed an increase in the numbers of rentals,
> a general (though small) decrease in price and an increase in the
> frequency of moves amongst people I know. They are moving up. That
> is, they are able to afford better accommodations cheaper in this
> market and what that tells me is that landlords are being squeezed
> and are subsidizing rents.
>
> Renting is a not just a good option for the moment, it is the preferred
> alternative to ownership. It does not carry any of the risks of municipal
> tax hikes, rising interest rates, deflating property values or escalating
> costs for materials and maintenance brought on by the commodities
> surge. And if you don't like the landlord or his rent you can just
> pack up and move to a better priced alternative. That gives you freedom.
>
>
> Rent well and save your money.

Jun 09 11:34 AM

[Jeff:]

wp dragon

You really should come out of your bunker, thanks for your encouragement about my loan, but you missed the point. In March and most of last year, I could not get a jumbo loan
at any price. When I could find one, they went for 8% to 15%. In May I refinanced my jumbo with BofA for 4,7%, and now, oh no, they are going for 5.5%.

5.5% is alot better than, not at any price, or 12%. Things are better than last year if you just look around.

Speaking of renting, I just bought a 2/2 condo in Las Vegas for $45,000, much less than replacement, and I rented it to a nice family for $750 a month, receiving a 9.5% return, with property management included.

If you look around, outside your car, or rental condo, you will see that it's no longer 2007 and opportunity abound.

My grandmother called me in 2007 and said sonny, my house has doubled, yet I've done nothing to improve it nor do I work, sonny, this market can't last.
Her house is now down 45% and the excess has been returned to it's proper owner.

Unless you are saying that condo's in Vegas are going to 0, I think that a 72% decline is nearer a bottom than a top. Don't miss out on the investment opportunity of a life time because of a memory based in fear.

Jun 09 05:41 PM

[cameroni:]

I am still anticipating further real estate price declines. At least for the moment. Usually we see prices are high and escalating as money gets cheap. When interest rates rise on the other hand, housing prices stabilize, flat-line or actually decrease.

But we have gone through a long period of declining prices already and money is as cheap as it can get. And now we know we are entering into a period of rising interest rates. So declining real estate prices going into a period of increasing interest rates suggests more downward price pressure to me.

The current low prices should therefore decline further. Add to this the poor employment picture and generally declining wages and salaries and you see my point.

Do not be fooled by a slight up-tick in spring spending on housing. That is the domain if the young and inexperienced. For those of us who have been around longer we know that housing prices also follow a seasonal trend and we anticipate home price declines as winter approaches.

Add that to the mix of interest rate hikes, job losses and a slow economy. Add that to the trend to saving (not buying) and add that to the trend to sell before the market declines further and you see my point.

With bankruptcies seriously on the rise, municipal taxes increasing and the slight whiff of inflation in consumables and food and we may really have the perfect storm for housing declines developing for many, many periods to come.

Like I said before, Green Shoots now, Scorched Earth later.

Jun 09 09:40 PM

[ain't no fo...:]

Jeff, you'll find this difficult to understand, but I have no fear. I have done well in my own right with my own investments, which happen to be stocks. To each his own. I have no desire to be saddled with a house or condo in a market which MY opinion tells me is not done dropping. You see inflation in your housing investment, I see deflation... a LOT of deflation, because you don't undo in 18 months a 30 year drunken credit spree that became the biggest financial bubble in mankind's history. It takes TIME to work thru that mess. So far I have been more right than wrong this past two years. The market will decide whether I am still right one or two years from now.

I LIKE my life, and I like going with the weather. My blown out knees LOVE my decision. I hike the beach 6 miles a day. I hike in the mountains 5 months a year and see deer, moose, black bears, nature at its most beautiful and most free... I don't LIVE in my car or a freaking bunker or my rented condo. I LIVE where I want and the car and the condo are the tools I use to get there.

I make my money in stocks. That is what I am good at. Long, short, whatever the flavor of the day is. It is what I do, and I have no more desire to be saddled with a condo or house as an "investment" (often what becomes an investment starts out as a great idea gone bad by the way) than I do in living in a city like Las Vegas or NY or Miami.

I'm FREE, like few people I know, and it doesn't suck. The fact that I cast a disparaging eye on this disaster that you seem to think is just going to leap from the ashes any day and resume the parabolic rise it experienced in the leveraged "good old days", and that I am very suspicious of the games people have fallen for in their rush to commit credit suicide doesn't mean I don't have gratitude for the life I have, it simply means I am gonna be damn serious about keeping that life despite what the cheerleaders who drove us to this terrible disaster are shilling lately.

Good luck to you.


On Jun 09 05:41 PM Jeff wrote:

> wp dragon
>
> You really should come out of your bunker, thanks for your encouragement
> about my loan, but you missed the point. In March and most of last
> year, I could not get a jumbo loan
> at any price. When I could find one, they went for 8% to 15%. In
> May I refinanced my jumbo with BofA for 4,7%, and now, oh no, they
> are going for 5.5%.
>
> 5.5% is alot better than, not at any price, or 12%. Things are better
> than last year if you just look around.
>
> Speaking of renting, I just bought a 2/2 condo in Las Vegas for $45,000,
> much less than replacement, and I rented it to a nice family for
> $750 a month, receiving a 9.5% return, with property management included.
>
>
> If you look around, outside your car, or rental condo, you will see
> that it's no longer 2007 and opportunity abound.
>
> My grandmother called me in 2007 and said sonny, my house has doubled,
> yet I've done nothing to improve it nor do I work, sonny, this market
> can't last.
> Her house is now down 45% and the excess has been returned to it's
> proper owner.
>
> Unless you are saying that condo's in Vegas are going to 0, I think
> that a 72% decline is nearer a bottom than a top. Don't miss out
> on the investment opportunity of a life time because of a memory
> based in fear.

Jun 09 11:32 PM

[Swashbuckler:]

Nice to see Jeff and the dragon keep the discourse civil. ( Although I must confess that sometimes I do get a big kick out of watching posters going off on each other). My opinion of the economic realities ahead is more in keeping with the dragon's, but good luck to you both.

Jun 10 09:12 PM

[ain't no fo...:]

"(Although I must confess that sometimes I do get a big kick out of watching posters going off on each other)"

Swashbuckler, several times a day I must remind myself that I'm not over on the Yahoo message boards anymore where the dialogues get a bit more interesting, but am here, breathing the more "refined" atmosphere of S.A. instead.

And best of fortune to you.

Jun 10 11:11 PM

[Jeff:]

Were just havin fun..... I can see, and argue for both sides of this nasty economy.

There are plenty of good points on both sides. My problem is when someone can't see the whole picture, and only sticks to their own ridged dogma.

Life will be fine if we just repeat the following truths,

No......body.......kno...

and,

Nothing is ever as bad as you think and nothing is ever as good as you think.

Jun 12 04:18 PM

[Jeff:]

knows......

Jun 12 04:19 PM