NEW YORK (Reuters) - 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, told Reuters that 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 in the 10s of percent,” Shiller said in an exclusive interview.
“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 the best-selling book “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 center 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. The OFHEO index only measures homes bought with so-called conforming mortgages, or those permitted to be purchased by Fannie Mae FNM.N and Freddie Mac FRE.N., 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 United States in August, marking the eighth straight month of negative annual returns and the 21st of decelerating returns.
The 10-City Composite index’s annual decline of 5.0 percent in August was the biggest monthly drop since June 1991. The biggest on record was an annual decline of 6.3 percent recorded in April 1991. In August, the 20-City Composite recorded an annual decline of 4.4 percent.
“Based on the futures market for the S&P Case-Shiller Composite Index, we are looking at home prices down another 5 percent 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 Great Depression housing bust was a very transforming event because it led to housing reform and a fundamental change in mortgage institutions at a time when millions of people could not become homeowners or risked losing their homes. Congress created the Federal Housing Administration in 1934 and the government established Fannie Mae in 1938.
“We have not had an event as big as that, but I think this one might be comparable and it might cause a lot of changes and reform in the industry, regulatory structure and just the way we do business,” Shiller said. “That would be the good that comes with this.”
Many economists say lower real estate prices will bring buyers back to the housing market next year and they are predicting a rebound in home sales by the middle of 2008.
“They could be right, but I am thinking there is a good chance they are wrong,” he said.
Reporting by Julie Haviv, Editing by Jonathan Oatis