Shiller: House Price Decline Could Be Worse than Depression

Shiller’s main points:

• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it’s not a stretch to think we might exceed that drop this time around.

• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).

• The current hopeful consensus — that house prices will bottom soon and then begin to recover — is most likely a dream. Housing markets don’t usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

U.S. House Price Decline Could Be Worse than Great Depression, Economist Shiller Says
Henry Blodget
Yahoo Tech Ticker, Sep 04, 2008 01:36pm EDT

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  1. HCF commented on Sep 5

    I think that most people STILL believe that housing is a GREAT investment. I honestly believe that we will not see the bottom of this until at least half say ‘Screw it, housing is a losing proposition.’

    That would be the official end of the irrational exuberance, at least in that asset class…


  2. Rich Shinnick commented on Sep 5

    ..and America will be a better place when homes become affordable once more because

    1. People will stop focusing on the value of their homes as a measure of successs and get back to work!

    2. We will relearn the lesson of our grandfathers—-all good things come from hard work, thrift, selflessness, and common sense- not paper profit!

    3. The top financial minds in the world will move on to something more productive than trying to figure out how to cleverly slice and dice mortgages in to “tranched-CDO-derrivative-swap-monster” thingys…

    4. Young families will now be able to exeprience the American Dream without having to become slaves to a mortgage payment that eats up 70% of their income!!!!!

    Falling home values may become synonomous with rising American values….hey folks, don’t forget to vote!

  3. Tom Lindmark commented on Sep 5

    As to Shiller’s third point, past history would indicate that the recovery after a housing bust is slow and gradual. The comment that, “And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.”, is speculative and not supported as far as I can see by any data. In fact, since it is forward looking, it is impossible to support unless he is drawing straight lines based on prior periods.

  4. Francois commented on Sep 5

    Wherever the bottom in housing will be, there is an ineluctable fact: house prices must be aligned to incomes.

    Since incomes are not permitted to rise (Right Janet Yellen et al? That is what you want, right?) house prices must come down, or there isn’t a buyer on the horizon.

    Of course, I won’t mention credit since it is barely available to ordinary folks who’d like to buy a house anyway.

  5. John commented on Sep 5

    The idea that “House Price Decline Could Be Worse than Depression” is not necessarily relevant per se. Prior to the Great Depression, was there a nationwide housing bubble (that is, outside of Florida), and if so, how big was it? Without at least some sort of a bubble then, comparisons to today’s real estate price action might not be meaningful. Today, the problem is not that housing prices are falling, but that prices went up so far in the first place.

  6. Eric Davis commented on Sep 5

    Finally, you are with the program…..

    Global Depression MEME.

    Oh!!!! the Breadlines, and the Hobo’s jumping the Boxcars……

    It’s going to be Terrible

    Riding east-bound freight train, stealing through the night

    He was just a lonesome hobo who was fighting for his life

    The sadness in his eyes revealed the torture of his soul

    as he raised a weak and weary hand to brush away the cold.

  7. HARM commented on Sep 5

    “”And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.”, is speculative and not supported as far as I can see by any data.”

    Exactly what’s so “speculative” about this statement? If house prices “stabilize” (don’t go higher) in nominal terms, and inflation is a number greater than 0% (which it has been since the Fed was created back in 1913, barring the Great Depression), loanowners–pardon me– “homeowners” will lose out to inflation. Nothing unreasonable in there to me.

  8. Mark E Hoffer commented on Sep 5

    to point #3, as heard above, the only ‘V-shaped’ recovery in house prices will be in nominal terms, only..

    same applies to ‘stock’ prices..

    it’s a Credit World, and Credit is broken..

  9. VennData commented on Sep 5

    The historical returns on housing are not good.

    Shiller’s point that real house prices are unchanged for a hundred years means, that where ever they end up, from there, the odds are that they “don’t go higher” in nominal terms is a guess based on the historical data that they usually don’t.

    Homeownership is an expensive, cultural behavior. The weakened mortgage market, high commission plus other switching costs, and “underwater” positions only make the market less efficient. A less efficient market will not “correct” as easily. The government should focus on making the market fluid, not putting “a floor” under prices.

    But the worst thing the gov’t could do is take the WSJ Holman Jenkins’ advice and bulldoze homes.

    Today’s high inventory means that lenders have less security (sorry about that.) But more homes means more, cheaper, places for people to live until will fill them up. That will put money in the pockets of consumers, like a tax cut.

  10. pmorrisonfl commented on Sep 5

    Dear Dr. Bernanke,

    You have a problem I may be able to help with. I make 40,000/year, and have a $500,000 mortgage on a $200,000 house. So do my neighbors. If something were to happen to those mortgages, well, you wouldn’t want anything to happen to those mortgages, would you?

    So I have a proposal. I was thinking that you could fly your helicopter over my house and drop a billion dollars into my yard. I could settle up with my bank on my house and the house next door, buy a new SUV down at the Ford dealer, and take the family on a shopping spree at Best Buy. No fear of my mortgage going in to default!

    I’m sure your printing presses can print up the 100 Trillion or so it would take. Think of all the help that would be to the American consumer. USA! USA! USA!

    A Citizen

  11. Tom commented on Sep 5

    Housing prices seem to drift down for at least as long as they go up. So, if the last upswing started in 1996 and ended in 2006, the next upswing should start in 2017. Depending on location.

  12. leftback commented on Sep 5

    “We’re all ridin’ on the D train….”

  13. bonghiteric commented on Sep 5

    This is from the BEA’s website:

    Personal saving — DPI less personal outlays — was $133.8 billion in July, compared with $272.9billion in June. Personal saving as a percentage of disposable personal income was 1.2 percent in July, compared with 2.5 percent in June. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home
    equity loans), by selling investments or other assets, or by using savings from previous periods.

    I’d posit that the savings from current income must trend positive before the housing market recovers nationwide. With banks tightening lending a homebuyer must have savings for a down payment. In my opinion that down payment would come from current savings rather than in the form of a gift.

  14. montaigne commented on Sep 5

    So should folks not buy now and just ride out the storm for a few years or only go in if they can get a house for 10-20% under asking price? Or does someone try and stay in the 3 to 3.5x earnings area. Do any of the old rules still apply?

  15. Dave commented on Sep 5

    When I see Barry on a breadline, I’ll know we’re in a Depression. Until then fairly happy days are here again.

  16. Mongo commented on Sep 5

    Home price declines are already approaching those in the Great Depression, when they plunged 30% … With prices already down almost 20%, it’s not a stretch to think we might exceed that…

    I’m curious what other bases for these similarities might exist: Was there a similar speculation in commercial and residential property in the 1920’s leading up to the depression? Concurrently, was there an inflation in sales prices of single-family homes? Did financing for homebuyers (similar to low & no-downs) exist, which left homeowners with little equity and banks with large outstanding balances when foreclosures occurred?

    Love to see some historical comparative data along those lines (As an Irish friend of mine observes, “Ah, you’re just a slut for the data”).

  17. Richard Halloran commented on Sep 5

    I am in total agreement, I have been following this blog for quite a while and I have found it to be such a useful resource. I run a blog for real estate on Long Island and I the data there agrees that we already have had a 18% to 20% drop and we could easily see another 10 % before it is all over.

  18. Inflationscoming commented on Sep 5

    I don’t think inflation really hurts homeowner that much. It may even help.

    If the inflation is the enemy of those on fixed income (old cliche but true) then it must be the friend of those on fixed payments, right? What’s mortgage? Mostly, a fixed payment. Add the fact that the amount of debt is fixed in nominal terms and not indexed and I think that inflation could be a help to housing reovery, not a hinderance.

    Total disaster for the rest of the economy if it get’s out of control but not so much for housing (at least for those who already have a mortgage at current fixed rates).

  19. Chuck Ponzi commented on Sep 5


    I think you’re smoking crack.

    Really, only 10% down?

    Pray tell, did you see this collapse coming? What makes you think only 10% in your area?

    As near as I can tell, LI is screwed bigtime. The only thing selling is already off 30% peak and trending lower FAST! You should know, you’re a broker!

    Chuck Ponzi

  20. REO Guru commented on Sep 5

    I read all the other entries and there’s one point not really spoken about. When you think of the easy credit extended to housing over the last few years you can see that housing really did not appreciate in value, it just inflated in dollars.

    Prof. Schiller states that when you adjust for inflation, homes have not changed in value over the past 100 years or so. This is similar to an explanation I heard about an ounce of gold ($20 gold coin) being able to buy you a nice suit and some extras 100 years ago. Guess what, it can still do that today, but $20 bill can not.

    All along we’ve been thinking the dollar was stable as a measure of “value.” We thought that due to scarcity and a long list of other reasons, housing was going up in value. Well, it was the other way around! The home (i.e. the ounce of gold) has remained steady in value, its just our paper money that’s been going up and down and now to hell in a hand basket.

    When we finally decided to remove the dollar spigot (i.e. sub-prime,…etc) off housing the dollar regained some of its value in terms of home prices. Since the home values were so inflated, they will continue to fall, and fall, past the 10% stated here, and in particular CA, FL, NV, AZ, et. al.

  21. sierra commented on Sep 6

    HCF…. you have no clue do you?
    another lamebrain BS post! babbling BS!

  22. Mark commented on Sep 6

    people forget that MANY houses and condos have been built for fast money have just come on the market, and sitting empty-there are also tons of condos and houses still under construction where the contracts to build were signed before the downturn, and even now MUCH LAND IS BEING CLEARED FOR NEW CONDO, HOME and RETAIL SPACE-
    there will be a 5 -10 years housing excess-and the worst part-they wont be worth anything

  23. Charles Hoyenski commented on Sep 6

    I think the last poster was right: even now as I write this, thier are hundreds even thousands of condos and homes left empty in my city of Austin texas, yet new homes are STILL under construction, it’s amazing that the financiers and builders of these current projects dont’ “see the forest through the trees”, these residences will be empty, thier are not enougf people with here in the city with sufficent incomes to purchase or even rent these new properties. It will take a decade for this situation to correct itself, until then rents & home prices and all manor of real estate assets will be depressed and undervalued. I’m glad I’ve got a fixed mortage !.

  24. Capitalist commented on Sep 6

    The problem will never be explained correctly because it involves the perversion of socialism. The foundations of the housing racket were based on greedy socialists that wanted anyone they could get their hands on buying a house and paying local property taxes on those houses. That is why Sally coffee shop worker that earned 20K per year was allowed to acquire a mortgage for 300K on a house that would be impossible for her to afford, as an example. No money down, variable rate interest loans with spikes of 4 – 5 %, the deluded that believed they could buy/sell at will for profit regardless of market conditions, the jokers building $350 million dollar high schools and then throwing the bond debt on local homeowners with impunity and in an undemocratic way, well, it is the recipe for revolution.

    The key to the con though was making it easy for the conned to pull equity out of these properties, thus masking the real nefarious nature of the housing Ponzi problem. This mess will take decades, not years, to fix.

  25. Dave commented on Sep 6

    Some of the comments exclaim that “housing is no way to make money”, or “don’t be a slave to a mortgage”.
    If one saves a little money,purchases a home with a 15 or even 30 year mortgage and pays it off,you can live rent free for the balance of your life!
    All that is needed is taxes and insurance to keep that roof over your head(you can even drop your insurance if the home has no mortgage).
    The only slaves are the ones who pay rent- which is always rising-they are the ones who will have to have both spouses maintain an income into old age-not the homeowner.

  26. Bob Anson commented on Sep 6

    I think housing will continue to drop by as much as 30 to 40 percent before we see a stabilizing of price. Housing is way overpriced and so is rent. With wages falling in most sectors, it is not hard to understand that housing will as well. Don’t but unless you get 35% off the asking price. Let the banks and the owners pay taxes on the property if they don’t want to sell.

  27. C commented on Sep 6

    I agree house prices have more to fall.

    But everyone I know who rents still want to have a house. Here in the Chicago area I still see people waiting in the car for their spouse or whomever in front of the Jewel store reading those free home for sale handouts that are in front of the store.

    I think there will be a lot of pent up demand once things become more affordable or incomes rise due to inflation or both.

  28. Capitalist commented on Sep 6

    Dave, the folks renting are the smart ones, not slaves. When local government can arbitrarily tax property owners into serfdom, the servants become the masters, don’t they? Absolutely. When 60% of a community rents but wants a new $300 million dollar school, or some other wasteful socialist project, do the 40% of property owners get their say at the ballot box?

    If you pay off your home free and clear, why should you be required to pay $500.00 – $1K a month in taxes on it after you already own it? Isn’t that slavery? You bet it is. Another example is this: Why should a retired elderly couple, for example, pay taxes to build a new school when that same couple was taxed to build two new ones before? Their kids are grown. Is starving elderly people the norm now?

    The entire property system as we know it in this country needs draconian reform.

    The housing market isn’t even close to imploding yet. Congress is going to force out private investors in Fannie Mae and Freddie Mac. That means taxpayers (land owners) are going to foot the bill for government’s takeover of how private property is bought and sold in the United States. It will be the biggest taxpayer bailout in the history of modern economics.

    Also, if Americans were being paid wages structured in a way that is different than how China treats its manufacturing and service industry employees, Americans could afford their homes.

    The robber-baron corporation problem in the USA which has pushed wages and benefits down to levels never encountered before in American history, combined with arbitrary tax schemes of land owners will have no outcome other than the total collapse of the housing market in the United States and the West for that matter.

    It’s hard to make a mortgage payment with Chinese-level wages. If that weren’t true, millions of Americans would not be defaulting on their mortgages.

  29. Sing Expat commented on Sep 6

    The current consensus is shifting but still erroneous. Most analyses of the housing market are based on either false hope or naive pessimism. The former is simply Lereah, Wall Street, and Main Street believing it’s different this time or that God has ordained that US real estate will be great and good. The latter is the belief that prices have fallen so much that they can’t fall any more.

    Reality: affordability is still the key. Screw people and their dumb dreams of ownership. Screw rising prices. If you can’t afford the payments, you can’t live in the house. It’s simple but the point gets ignored in the emotional arguments about “collapses” and bailouts.

    House prices should be between 2.5 and 3 times income. Alternatively, they should run between 90 and 150 times the rent. Why? These are not random numbers picked by Bernanke or Lereah. These long-term ratios are determined by what people can safely afford. Time and again it has been shown that if you spend more than this on your home, you will statistically be likely to default.

    You can’t refinance, rebalance or wave a wand. The only thing you can do is give up your house or effectively negotiate a LOWER price with your lender, the same price you should have been willing to pay in the first place.

    What does this mean? It means ignore the bullshit about “Oh, God, we can’t fall any more…we have already fallen twenty percent!” or “This could be as bad as the Great Depression”. It’s all crap. The numbers will be dictated by affordability.

    For lack of a better measurement, economists often use median income to guage the market. US median income is about $48.5k. The median house price is still apparently around $200k. That means price is about 4.1 times income, still way above the affordability range.

    Let’s use 3 times income, the high end of the ratio. That means the median US house price needs to fall to about $145k, a further fall of 27.5%.

    Factor in jobs, lending conditions, and housing inventories, I would plump for a ratio of closer to 2.5 times income. That means $120-125k prices. Another 40% drop.

    If you have a counter argument, other than “it’s different this time, in this place, for me, for Iowa, etc.” then please respond.

  30. King George commented on Sep 7

    This is funny. The whole point is to create a system where most of you CANNOT AFFORD to own your own homes. Housing will be a great investment for those with money. Alas, for 99% of the population, you’re destined to rent. Your net worth is approaching zero. Wealthy Europeans own New York and LA. The rest of you just haven’t realized it yet. You are their slaves.

  31. Pinktip commented on Sep 8

    “Let’s use 3 times income, the high end of the ratio. That means the median US house price needs to fall to about $145k, a further fall of 27.5%.

    Factor in jobs, lending conditions, and housing inventories, I would plump for a ratio of closer to 2.5 times income. That means $120-125k prices. Another 40% drop.”

    Your close, but still high…..factor in “Real” inflation(gas, food, heating, daycare)20% gross desireable savings rate for retirement, and the avg house should be no more than 1.5X earnings. IF the public were aware the these economic basics and not dumbed down, We would be in much better shape…..02c

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  33. Big M commented on Sep 17

    The only thing that’s happening here is that house prices/values are returning to Earth, after years of being artificially ginned up. It’s a mystery to me how many idiots in this country believed the bilge that a house with no improvements made on it, getting older, and serving no enhanced purpose, could increase in value 20-40% every year. Anybody with an ounce of brains knew that eventually the music would stop, and a lot of people wouldn’t find chairs.

    Along with these same dolts treating their houses like ATMs and borrowing against this “equity” that had been created out of thin air.

    Truly, a nation (really, a clown kingdom) of drooling, f***ing imbeciles.

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