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.
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