Noted Yale University economist Robert Shiller, who predicted the housing market bubble, recently warned in a speech at the New Haven Lawn Club that the housing slump is likely to cause prices to fall more than they did during the Great Depression. He further predicted that bailouts will be needed to stop millions from losing their homes.
Shiller is one of the pioneers behind the Standard & Poor’s/Case-Shiller home price index. The index is seen as a solid measure of home prices because it examines changes in the price of the same property over time versus calculating the median price of homes sold during a particular month.
Shiller believes that housing prices will fall beyond the 30 percent decline that occurred during the 1930s. To date, home prices nationwide have fallen 15 percent since peaking in 2006. “I think there is a scenario that they could be down substantially more,” Shiller advised.
From 1997 to 2006, home prices rose about 85 percent adjusted for inflation, which is the biggest housing boom in U.S. history. According to Shiller, “Basically, we’re in uncharted territory. It seems that we have developed a speculative culture about housing that never existed on a national basis before.” He ridiculed the notion, accepted by many, that housing prices would increase 10% annually.
Shiller has endorsed legislation to allow the Federal Housing Administration to back as much as $300 billion in mortgages for struggling homeowners. The plan calls for lenders to take a loss on existing loans and for borrowers to show that they can afford to make payments on refinanced home loans.