Robert Shiller, the economist who co-founded the S&P/Case-Shiller index of U.S. home prices, said a further decline in property values of 10 percent to 25 percent in the next five years “wouldn’t surprise me at all.”
“There’s no precedent for this statistically, so no way to predict,” Shiller said today at a conference hosted by Standard & Poor’s in New York.
U.S. home prices plunged 33 percent in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to a Case-Shiller report on May 31. The decline signaled a “double dip” as the index fell below its previous post-housing-bubble low set in April 2009. Prices more than doubled from 2000 to July 2006.
A backlog of foreclosures poised to hit the market means prices may stay depressed, dissuading builders from starting new construction. Unemployment, which rose to 9.1 percent in May, and stricter lending conditions are signs that any recovery in housing may take years.
Shiller’s comments paint a more pessimistic possibility for home prices than other forecasts. Additional declines will be “incremental,” Bank of America Corp. Chief Executive Officer Brian T. Moynihan said on June 1.
While it would be a surprise to see prices fall steeply, it’s possible for homes to lose more value if inflation picks up, Karl Case, co-founder of the index, said today.
“You could have flat nominal prices but still have it go down 20 percent,” Case said during an interview at the conference. “If house prices stabilize, they could still go down in real terms. If we had inflation, it’d be great, because it’d mask a 25 percent decline.”
A model for the U.S. may be Japan, where home prices fell for 15 years after that country’s real estate bubble burst in the early 1990s, Shiller said.
“They lost close to two-thirds of their value,” Shiller said. “Then they went up for one year in 2006 and then they started going down again.”
Forecasting home prices is impossible because there’s no historical precedent for the real estate bubble of the 2000s and the subsequent price drop, Shiller said.
“In real terms, there has never been a bust of this proportion,” he said. “Even in the Great Depression, home prices fell nominally approximately almost as much as they did recently. But that was with all prices falling. So real estate prices didn’t go down hardly at all during the Depression.”