Shiller Warns of Double-Dip Home Price Drop, ‘New Recession’

Bubble was 'unique in U.S. history'

The housing market is in for more losses, and the bubble that preceded its unprecedented drop was "unique in U.S. history," Robert Shiller, Yale professor of economics and author of "Irrational Exuberance," said Thursday at the Standard & Poor’s Housing Summit 2011: Boom, Bust and Beyond on Thursday.

Addressing "unusual factors" that he said influenced the outlook for the housing market, Shiller spoke about the human factor, specifically the tendency of humans to focus on anomalies that both command a person’s attention and affect the decisions he makes. He pointed out that such an instance occurred during the dot-com boom of 2000-2001, saying that it was "not so much a failure of judgment as a failure of attention."

A similar focus on an anomaly occurred during the housing market boom, he asserted. The anomaly was that people stopped regarding homes as homes, and began to think of them as investments in land — although, according to the National Association of Homebuilders, 80% of a home’s value is in its structure and the other 20% is in its land.

The resulting boom, as people became obsessed with real estate, gave way to "the biggest collapse in home prices the country has ever seen," even bigger than the collapse of the Great Depression. During the Depression, Shiller said, home prices went down but so did the prices of everything else. When the housing market collapsed this time, home prices went all by themselves, because their fall began in 2005, prior to the beginning of the recession.

Pointing to the post-World War II era, another time during which real estate prices also boomed and carried rents higher as they rose, Shiller said people attributed the increases to the aftereffects of the war, which had shut down the construction industry and instituted rationing. The postwar boom meant that the restrictions were gone; people who had wanted homes were finally able to buy them.

"What’s different," he said, "is that they didn’t have the buyer’s panic we have now. ... People have more anxiety about protecting themselves and they feel they have to invest." But they’re mistaking investments in homes for investments in land. The current downturn, he added, is due to the housing bust — "the 34% drop in housing prices we saw since the peak," he explained.

'New Recession' Possible if Jobless Rate Continues Rise

"It’s a housing recession." The fact that unemployment showed another increase, he said, could just be seasonal—but if another month or two of increases in the unemployment rate occur, it might indicate either a double-dip or even a new recession, "because it’s already been two years, and it wouldn’t count as a double-dip and will just be another recession."

Shiller also said it was impossible to predict what will happen now, "because it’s really important to recognize that this bubble is unique in U.S. history, so it’s impossible for a statistician to forecast." He expects a double-dip fall in real estate prices "might" happen, and thinks it likely that the Case-Shiller home price index could fall further.

While he cautioned that a statistician can only compare one event to others, and stresses that the housing bubble is unique, he said, "I’m thinking this was the biggest crisis since the Great Depression, and it may not look good for a number of more years. That’s not a forecast, but a 10-25% decline in real home prices would not surprise me at all."

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