Shiller sages grim future for real estate

On a night when exit polls for the Pennsylvania presidential primaries showed that many voters already lacked confidence in the economy, Yale economics professor Robert Shiller delivered some less-than-inspiring words about the national housing market.

Speaking in New Haven on Tuesday afternoon, Shiller predicted that the current housing crisis, which has resulted in a nationwide spike in foreclosures and a decline in property values, will likely only become more severe — perhaps worse than during the Great Depression.

The dire prediction is perhaps no surprise coming from Shiller, a leader in the field of behavioral economics whom Money Magazine senior columnist Jason Zweig has dubbed “Mr. Worse-case Scenario” for his glass-half-empty outlook on the economy. Indeed, two Yale economists interviewed agreed that the housing market is bleak, but they said they are skeptical that Shiller’s predictions will come true.

“Basically we’re in uncharted territory,” Shiller said in the speech, according to The Associated Press. “It seems we have developed a speculative culture about housing that never existed on a national basis before.”

During the Great Depression, housing prices fell 30 percent from their peak. Since 2006, housing prices in the United States have already dropped by 15 percent.

Professor William Goetzmann ’78 SOM ’86, Shiller’s colleague at the School of Management and director of the International Center for Finance there, said the current price cycle is, “unlike anything we have seen in housing prices nationally before.”

Still, Goetzmann said he thinks the checks enacted by the federal government since the 1930s — including the creation of public lending agencies and subsidies for homeowners who default on their mortgages — make it unlikely that housing prices will drop another 15 percent.

“The drop in housing prices in the Depression was likely exacerbated by a collapse of the mortgage market and weakness in the banking system,” Goetzmann wrote in an e-mail. “We might experience this, but it is less likely now, given the existence of Fannie Mae and Freddie Mac and the likelihood that the government will intervene to provide liquidity to the mortgage market if it dries up.”

During his speech, Shiller — who founded and manages financial-research firm Case Shiller Weiss Inc. — said he advocates government intervention to address the spiraling market, specifically through a bill recently introduced by Connecticut Sen. Chris Dodd and Rep. Barney Frank that would enable the Federal Housing Administration to refinance at a discount the loans of homeowners who are unable to keep up on their mortgage payments.

“These FHA-mortgages would refinance the old, troubled loans at significant discounts,” Dodd said in a press release last week. “The new loans could be no larger than the borrowers could afford to pay.”

Dodd could not be reached for comment Wednesday, but a spokesman said the senator is aware of Shiller’s comments and has taken them into consideration.

But professor Roger Ibbotson, another of Shiller’s SOM colleagues, was skeptical of Dodd’s prescription. Putting money in the hands of irresponsible investors — like the homeowners currently defaulting on their loans — through government subsidies is irresponsible, Ibbotson said.

“I wouldn’t want to subsidize homeowners who bought homes when they shouldn’t have bought them,” he said.

But according to Goetzmann, who said he understands that taxpayers might be frustrated about having to bail out homeowners, there may be no other option than to have the government step in.

“In the long run we will benefit from staving off a serious collapse in household finances among lower-income and poorer credit homeowners,” he wrote in the e-mail. “I worry less about encouraging future risk-taking than I do about the risks this current situation has to the existing financial architecture.”

It is as yet unclear whether Shiller’s predictions will be born out in New Haven. Despite the national downturn, the housing market has actually been on the upswing in the Northeast — while national housing prices in March were down 7.7 percent from 2007, prices in the region rose by 4.6 percent, the AP reported Wednesday.

—The Associated Press contributed reporting.

Comments

  • Quinnipiac Student

    It is doubtful that the downturn would affect New Haven. New Haven, already one of the wealthiest metro regions in the United States, is getting richer every year as more and more technology, private equity and financial firms move in. Yale is doing $600 million in construction work every year and hiring hundreds of people. The Yale Cancer Center will only make things hotter. Downtown retail, office and apartment vacancy rates are at all-time lows, which is causing prices to rapidly appreciate. Boston, NY, etc., are going to suffer, but New Haven could actually benefit from a recession if construction costs declined.

    Of course, this is bad news for students because New Haven may start to lose some of the character that currently makes it the best college town in the Northeast.

  • SacredHeartOnline

    I am doubtful this will affect all areas as well. There are a lot of cities that are still booming with growth and real estate opportunity.

    Sarah
    [Winter Park Realtor][1]

    [1]: http://www.weicherthallmark.com/ “Winter Park Realtor”