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Shiller on more home price declines
Sunday, June 07, 2009
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 FallingA 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.
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.
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.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.
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.
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.
ooo
This week's cartoon from The Economist:
Read more...
Note that, if treasuries were on this list, they'd show only a modest gain from a year ago.
The Federal Reserve should consider raising interest rates earlier to prevent asset bubbles from getting too big, San Francisco Federal Reserve President Janet Yellen said Friday, in a notable departure from long-term Fed consensus that monetary policy should not be used to prick asset bubbles.
The doo-doo is getting deeper for the Orange Man, Countrywide Financial founder and former CEO Angelo Mozilo, who, yesterday, was on the receiving end of insider trading and securities fraud charges from the Securities and Exchange Commission.
And, of course, there's this classic interview with CNBC's Money Honey Maria Bartiromo during the summer of that same year.
Nonfarm payrolls fell by 345,000 last month following six months of declines that averaged almost 650,000, however, the jobless rate continued to rise, increasing from 8.9 to 9.4 percent, an indication that, while layoffs may have peaked, employers are reluctant to hire.
As always, education and health care payrolls expanded, by 44,000 in May after a modest increase of just 13,000 in April, and the various levels of government had a net loss of 7,000 jobs after adding 92,000 positions in April in preparation for the 2010 census.
As longtime readers know, this blog had something of an obsession with the giant SUVs back at the peak of the housing boom as chronicled in the late-2005 
This is supposed to be the dry side of the Cascades but, so far, it's rained everyday. Everything seems less expensive than in California - gasoline, utilities, insurance, food, you name it. More on our impressions in a day or two as a regular schedule should soon resume.
