Yale's Shiller: Housing Decline Could Be Worse Than Great Depression

Robert Shiller from Yale is quoted in this WSJ Marketbeat post (and elsewhere too I'm sure) as saying the decline in housing prices on this go around could be worse than in the Great Depression.

If so, that would be more than 30%. He said that so far, prices are down 15% from their 2006 peak.

Part of the reasoning attributed to Shiller is that housing prices went up by 85% from 1997-2006.

If you have done any reading on this you may have seen that prices in the Baltics, Spain, Ireland, Sacramento and Riverside county have all dropped precipitously, more than 30%.

The 85% number is a tough one for me to wrap my hands around. Based on comps of three sales within a mile of our cabin, prices here almost quadrupled from 1998 to September 2006. One of my brothers lives in Iowa, and as you know many places in the Midwest have practically sat out the boom. Hawaii started slowing down or rolling over or however else you care to describe it a little earlier than many other markets (my perception anyway).

There is no doubt that if Shiller turns out to be right it would create a nasty headwind for the economy. We can debate whether he will be right or not and we can debate what the magnitude of consequence would be but if correct it would be rough going for a while.

All of that is beyond our control, and so as a matter of philosophy I tend not to worry about things beyond my control. I do think it is worth remembering that there is value in having a place to live, there is psychic value in enjoying the place where you live and that if you have no plans to sell anytime soon and no plans to raid your equity (assuming you have equity) the decline in prices may not have to impact you in a meaningful way.

I do not deny the whistling-past-the-graveyard element to this - but there is a kernel of truth to it too.

Comments

[CarlosSlim]

In the words of Jimmy Cliff:

"The harder they come
The harder they fall
One and all"

[Jumboloans]

are you sure you got your numbers correct about housing price declines in Ireland, Spain??? The two largest Spanish banks (both I banks as well) are within winking distance of their highs. Unless they are hiding bigger mortgage credit losses than the US banks, you're "reading" the wrong stuff. The rises were spectacular, and they may well drop that much over time. But they are not even close as of yet

[phil dewey]

Let me help you get your head around this. If housing prices average a 5% increase year over year - a common assumption for real estate - the compounded increase from 1997-2008 would be 79.5%. Seems we're not that far ahead of ourselves.

[Hugh]

Houses do not average 5% per year. For a 100 years they have averaged 1% per year in real constant dollars. See Shiller's book.

[Roger Nusbaum]

I just read something a few days ago in one of the UK papers online about Ireland and my dad lives in Spain. Just like the US it is local--some parts of these countries have dropped more than others.

phil,I agree with Hugh that I don;t think 5% a year for years on end is normal but i might have this whole thing wrong.

[GKM]

Everything happens in nominal dollars. The last time I wanted to get real dollars the teller just looked at me - not understanding the Econ 101 reference. Real is actually a misnomer since real is not really real but fake, and nominal is what's real to you and me.

If nominal wages increased by only 2.5% for 10 years, then that means that wages to cover the increased housing prices (and everything else that has gone through the roof - pun intended) have only gone up by about 28%. That creates a spread that has to contract in one way shape or form. Go ask your boss for a 57% wage increase so you can pay for that overpriced house and he will likely tell you to buy a cheaper house. Then tell him you don't want to live in the trailer park anymore...

[svkoho]

I just returned from central valley CA and the bay area and the housing debacle is palpable: new Escalades and motor homes by the road with for sale signs. In Alameda only the sailboats leave the dock, the big powerboats stay tied up. My friend's neighbor did the jinglemail thing on his recently purchased bungalow and went literally down the street and purchased a foreclosure of an almost identical bungalow for 40% less.

[WAKEUP]

"I do not deny the whistling-past-the-gra... element to this - but there is a kernel of truth to it too." You're right, on both counts, as far as that statement goes. Here's the kicker, for today's (and many tomorrows') market: It's probably not a good idea, these days, to "whistle past the graveyard," with so many homeless people hanging around in shadowy places, waiting for someone who may have more than a nickel in their pocket, to happen by. . .

[swaps]

I bought into New Ireland Fund and it has tanked since then, prompting me to buy some more shares ....and wait. But the housing crash in Ireland corresponds with the drop in this closed end fund holding Irish shares.
When home prices drop, home owners are less likely to bid up shares in the stock market.