By JOE RICHTER, Bloomberg News

Published: September 1, 2007

Homes may lose as much as half their value in some U.S. cities as the housing bust deepens, according to a Yale University professor.

'The examples we have of past cycles indicate that major declines in real home prices - even 50 percent declines in some places - are entirely possible going forward from today or from the not too distant future,' Robert Shiller wrote in a paper presented Friday at an economic symposium in Jackson Hole, Wyo.

Depreciating real estate values may undermine consumer spending by spurring households to save more and by preventing them from tapping home equity. Residential property prices slid by the most in at least two decades in the second quarter as sales declined, a private report showed this week.

Because price gains were larger and more widespread this time compared with past speculative booms, the risk of 'substantial' price declines is greater, wrote Shiller, also the chief economist and co-founder of MacroMarkets LLC.

'The implications of this boom and its possible reversal in coming years stands as a serious issue for economic policymakers,' Shiller said in his presentation to the conference, which is organized by the Kansas City Federal Reserve Bank.

Fed Chairman Ben S. Bernanke said earlier in his opening speech to the conference that the Fed 'will act as needed' should a sustained tightening in credit threaten the economy.

Shiller, who examined price depreciation since 1987 with Wellesley College economics Professor Karl Case, noted 50 percent declines in the worth of some cities' homes wouldn't be unprecedented. Prices in London and Los Angeles fell by almost that amount from the late 1980s to mid- 1990s.

U.S. home values, adjusted for inflation, rose 86 percent from the end of 1996 to early 2006, the peak of the most recent housing boom, Shiller said. Economic factors such as rents and construction costs don't appear to explain the jump in prices, suggesting 'speculative thinking' and a 'boom psychology' was at work. 'Extravagant' expectations for future price increases since the late 1990s fueled the bubble, Shiller said.

Higher borrowing costs, declining affordability and a jump in the number of defaults among subprime borrowers have since sapped housing demand, leaving a glut of unsold properties. Excess inventories have taken the steam out of home prices.

Some economists see the prospect for improvement in housing as prices come into line with demand and excess inventories are worked off, which may happen as early as mid-2008. Lawrence Yun, senior economist at the National Association of Realtors, said an increase in sales and prices of existing homes in the Northeast during July may herald improvement.

Still, Shiller said it's 'not improbable' there will be big declines stretching over many years in cities that saw large increases during the boom, he said.

'Since the number of cities involved in the recent boom is so much larger than in the last boom, we could see much more than the 15 percent real drop in real national home-price indices that we saw' in the last housing recession in the 1990s, Shiller wrote.