Economist Robert J. Shiller sees warning signs in a national home-price index that dropped at a record rate in the third quarter.
“We are in the aftermath of the biggest housing boom in history,” said Shiller, a Yale University economics professor, in a presentation today. “We’re out of the range of normal variation in data. I take that as very significant. I think there is a significant chance of recession — of probably over 50 percent at this point.
“Most economists are still optimistic that there are a lot of signs of strength. I’m going out on a limb when I say I’m worried about a recession,” but he said he is definitely not alone. “More and more people are going out on a limb now.”
The Standard & Poor’s/Case-Shiller U.S. National Home Price Index, a quarterly gauge of changes in national home prices that is based on repeat sales of the same homes over time, dropped 4.5 percent in the third quarter compared to third-quarter 2006 and fell 1.7 percent compared to second-quarter 2007 — both declines represent records in the 21-year history covered by the national price index.
Shiller, who also serves as chief economist for MacroMarkets LLC, a company that maintains licensing rights to the national index and related metro-area price indices to create financial products, said that the only comparable period in U.S. history to the latest housing boom occurred in the 1940s, fueled by a surge in home construction at the close of World War II.
The massive home-price gains of the past decade are not explained by building costs, population or interest rates, he said, “So we have a remarkable phenomenon here that I think is anomalous. The question is: What is (the market) going to do next?”
The sharp downward trend in the price index already rivals the decline during the housing downturn in the early 1990s, Shiller said.
“I think we are in a period of exceptional uncertainty about the value of our homes,” he said, adding that home-price declines of 50 percent in real terms “is not out of the question — we’ve seen that kind of thing happen before.”
He noted that home prices fell more than 40 percent in the Los Angeles area from 1989 to 1997, and home prices fell substantially in the 1990s in London, giving up most of the gains they had experienced in the 1980s.
The national home-price index has fallen sharply this year — it peaked in 2004 above a 15 percent year-over-year price increase and has been in negative territory this year.
As the author of “Irrational Exuberance,” a book about speculative behavior that draws its title from a famous statement by former Federal Reserve Chairman Alan Greenspan, Shiller said that there is evidence for the speculative nature of the latest housing boom, though it is difficult to pin the blame on any one cause because it was a global event.
“Most big historic events have multiple causes,” he said, and “Every theory that attempts to explain speculative booms are on shaky ground.”
He said that some major nations, including India and China, are becoming increasingly capitalist, and there has been a “buyer’s panic” in the past decade that has accompanied uncertainty about real estate values.
Also, Shiller said that many of the world’s central banks may have underestimated the fallout from the global housing boom, as they did not take enough action to curb the boom.
“These central bankers have, I think, expressed some concern about the housing boom but maybe not enough. I think it was a general culture of the central banks that did not emphasize the problem of the housing boom and did not see any reason to tighten credit because of this,” he said.
David Blitzer, managing director and chairman of the index committee for Standard & Poor’s, said it’s unclear whether the housing market is about to hit bottom.
“I don’t see anything in the data … that would say we’re at the bottom or close to the bottom. Hopefully we’re halfway — I don’t see any clear evidence one way or the other on that.”
An S&P/Case-Shiller home-price index that tracks 20 metro areas fell 4.9 percent in September compared to September 2006, and 15 of the metro areas experienced year-over-year price declines.
In Tampa, the index fell 11.1 percent year-over-year in September. Next on the list was Miami, with a 10 percent drop, followed by Detroit and San Diego at 9.6 percent, Las Vegas at 9 percent, Phoenix at 8.8 percent, Los Angeles at 7 percent, San Francisco at 4.6 percent, Minneapolis at 4.5 percent and Cleveland at 4 percent.
Seattle and Charlotte had the largest gains in September compared to September 2006, at 4.7 percent. Next on the list was Portland, Ore., at 2.2 percent, followed by Atlanta at 0.4 percent and Dallas at 0.2 percent.
Source: S&P/Case-Shiller
