Housing Slump Could Exceed Drop Of Great Depression: Economist

Source : The Straits Times, Apr 23, 2008

NEW HAVEN (Connecticut) - AN INFLUENTIAL economist who long predicted the housing market bubble cautioned on Tuesday that the slump in the US housing market could cause prices to fall more than they did in the Great Depression and bailouts will be needed so millions don't lose their homes.

Yale University economist Robert Shiller, pioneer of the widely watched Standard & Poor's/Case-Shiller home price index, said there's a good chance housing prices will fall further than the 30 per cent drop in the historic depression of the 1930s.

Home prices nationwide already have dropped 15 per cent since their peak in 2006, he said.

'I think there is a scenario that they could be down substantially more,' Mr Shiller said during a speech at the New Haven Lawn Club.

Mr Shiller's Standard & Poor's/Case-Shiller home price index is considered a strong measure of home prices because it examines price changes of the same property over time, instead of calculating a median price of homes sold during the month.

Mr Shiller, who admitted he has a reputation for being bearish, said real estate cycles typically take years to correct.

Home prices rose about 85 percent from 1997 to 2006 adjusted for inflation, the biggest national housing boom in US history, Mr Shiller said.

'Basically we're in uncharted territory,' Mr Shiller said. 'It seems we have developed a speculative culture about housing that never existed on a national basis before.'

Many people became convinced that housing prices would increase 10 per cent annually, a notion Mr Shiller called crazy.

Mr Shiller, who said it's difficult to forecast prices, endorsed legislation proposed by Democratic Sen. Chris Dodd and Rep. Barney Frank that would allow the Federal Housing Administration to back as much as US$300 billion (S$405 billion) in mortgages for struggling homeowners.

Servicers would have to agree to take a loss on the existing loans, while borrowers would have to show they could afford to make new payments on their refinanced mortgages.

On Tuesday, the National Association of Realtors said that sales of existing homes fell in March while the median home price declined to US$200,700, a decline of 7.7 per cent from the median price a year ago.

Sales of existing single-family homes and condominiums dropped by 2 per cent in March to a seasonally adjusted annual rate of 4.93 million units.

Many analysts said they do not expect a rebound for a number of months, given the problems weighing on housing from a severe glut of unsold homes to tighter credit standards for prospective buyers and a rising tide of mortgage foreclosures. -- AP