Could take 5 to 10 years to reach bottom
Julie Haviv
Province
A foreclosed house is seen for sale in the Green Valley Ranch neighbourhood in northeast Denver, Colo., one of the region’s hardest hit by the credit crisis afflicting the U.S. economy. Photograph by : Reuters
NEW YORK — The U.S. housing market’s skid is nowhere near over and could extend for another five or even 10 years, according to one of the most-watched housing economists.
Robert Shiller, a Yale University economist and co-developer of Standard and Poor’s S&P/Case-Shiller Home Price Indices, said declines in home values in the most vulnerable markets could well double the losses recorded thus far.
What’s more, Shiller, who is also co-founder and chief economist of the financial firm MacroMarkets LLC, said predictions for a bottom within the next year or so are probably wrong, with price declines in 2008 possibly worse than those seen this year.
“There is a probability of a continuing decline for a period of years, bringing prices in many cities down,” Shiller said.
“The bottom is hard to predict,” he said. “I do not see it imminent and it could be five or 10 years, too.”
Shiller is famous as author of Irrational Exuberance, which sounded alarms about overblown stock-market valuations just before the dotcom bubble burst in early 2000.
More recently he has been a leading voice of worry about what had been a red-hot residential real-estate market until 2005, saying the market for houses had become infected with “an investor psychology.”
“The housing situation that we got in is unique in history because there was an investor psychology that developed that was stronger than we have ever seen before,” Shiller said.
“We have seen housing bubbles many times in history, but they have been much more local than this one.”
Areas most vulnerable to home depreciation are those that rose the most during the market’s heyday, plus those at the centre of the crisis in the subprime mortgage market, Shiller said. California and Florida are high on this list.
The index he developed with Wellesley College economist Karl Case has become Wall Street’s preferred gauge of home prices.
Compared with the Office of Federal Housing Enterprise Oversight (OFHEO) House Price Index, the S&P/Case-Shiller index includes homes financed with a broader range of loans, including subprime and jumbo mortgages.
OFHEO’s index only measures homes bought with so-called conforming mortgages, or those permitted to be bought by Fannie Mae and Freddie Mac, the government-sponsored mortgage-finance entities OFHEO oversees.
The S&P/Case-Shiller Home Price Indices showed further declines in the prices of existing single-family homes across the U.S. in August, marking the eighth straight month of negative an-nual returns and the 21st of decelerating returns.
The 10-City Composite index’s annual decline of five per cent in August was the biggest monthly drop since June 1991.
The biggest on record was an annual decline of 6.3 per cent recorded in April 1991. In August, the 20-City Composite recorded an annual decline of 4.4 per cent.
“Based on the futures market for the S&P Case-Shiller Composite Index, we are looking at home prices down another five per cent in 2008,” Shiller said. And that might be on the low end.
Nevertheless, similar to previous housing recessions, good developments could eventually emerge, Shiller said.
While the current downturn in housing is dramatic enough to prompt some to liken it to the Great Depression, Shiller cautions such comparisons are probably premature, for now.
© The Vancouver Province 2007
