By way of Bloomberg:
Robert Shiller, the economist who co- founded the S&P/Case-Shiller Index, said a 10 percent to 25 percent decline in U.S. home prices in the next five years “wouldn’t surprise me at all.”
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.”
Would it surprise you?
∙ Shiller Says Home-Price Drop of 10%-25% ‘Wouldn’t Surprise Me’ [Bloomberg]
∙ S&P/Case-Shiller: San Francisco Top Tier And Condos Tick Up In March [SocketSite]
He should realise that his words are powerful and don’t help the situation. Would the Fed Chairman say he wouldn’t be suprised that the economy will drop x% in the next 5 years.
I don’t disagree, but it’s just not a wise move.
Brilliant…next we will hear that people will not accept a home if offered to them for free. There is a basic utility value to for-sale housing that trancends opinion. That utility value is the price of alternative housing choices (rents). Any undergrad knows that. The recent housing crisis unhinged that relationship and the correction that we are experiencing is returning us to the historic trend line of this utility value relationship. That is what determines home values on a macro-level and on a medium to long term basis.
I like the Case Shiller report / index as it provides probably the best and most consistent view of the data. I’ve not found Robert Shiller to have particularly better insights into making market predictions than most other analysts. The best has been Roubini who has made similar statements about the double dip, although he is on record as stating that the market is already in the throws of the double dip. I do think that looking at the sector nationally that a 10-25% dip is not out of the question.
Of course, this is SF Focused site and I do not think we’re (SF Prime) not going to be following the national trends point for point over the next 5Y any more than we have the past 5Y. My personal guess is that we’re (SF Prime) looking at a 2-10% dip over the next 5 years. I think a 10% dip in 5 years is going to be a stretch and 25% dip is out of the question short of some unexpected stock market crash . There will certainly be cases of homes showing -25% but on an broad basis, I don’t think so.
He also said:
“There’s no precedent for this statistically, so no way to predict,”
Not exactly confidence inspiring remarks.
Regarding his range of decline, I should have read the linked article first before posting. Real / Nominal / Inflation Adjusted….
“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.”
Seems like a lot of analyst double talk, although I would be interested in hearing or reading his complete commentary if anyone finds a full link.
“But is different! Everybody wants to live here!”
Recently relocated from SF to NYC, and it’s astounding to hear the same emotional (as opposed to logical) arguments for prices on both coasts. “But it’s a , there are only so many available.”
“But is different! Everybody wants to live here!”
Recently relocated from SF to NYC, and it’s astounding to hear the same emotional (as opposed to logical) arguments for prices on both coasts. “But it’s a , there are only so many available.”
I take Shiller seriously when he speaks. After losing a ton in the dotcom crash, and then reading Shiller’s essay in Barron’s in the summer of 2005 (“The Bubble’s New Home”), I knew it was time to sell my SF condo. Everyone around me said I was bonkers and that I would never get back into the market. I lost many “friends” who were selling real estate, hawking mortgages, selling furniture and design and such, but I took Shiller’s warnings seriously, and sold. It was the best financial decision ever! I bought the condo for $710000.00 in 1999, sold it for $1,180,000.00 in 2005. Today, Zillow (I know, not a perfect measure) zestimates the property at $745000. That sure looks like a bubble driven by the animal spirits to me. Thanks Shiller!
If Shiller suggests another 10% (or more), decline, it makes sense to listen and plan accordingly. His recent observations about the over-valuation of the stock market (he thinks it’s 40% or so) also gives me pause because he made similar warnings in 1999 during the dotcom bubble. In fact, I can’t help but note many of the same dynamics at work in SF right now as tehn. Are many of you coming across people in social media companies with tons of venture capital and business plans that bear an uncanny resemblance to plans we heard in the late 90s? I am.
“Seems like a lot of analyst double talk”
Not really when it’s the typical course in a housing bust. Just look at the 90s.
“Seems like a lot of analyst double talk”
not sure I agree here. one must clarify what one means. he is simply stating that he foresees up to a 25% drop in real (not nominal) housing values. seems like a reasonable statement to me. (only talking about his statement, I neither support or deny his estimation of 25%)
it is nigh impossible to predict future nominal housing prices given the prolonged balance sheet recession/credit crisis and the instability of the dollar, specifically in an era where we are devaluing our dollar and risking a currency crisis. (not to mention that it is impossible to predict valuation on a product that is essentially government controlled/supported and thus held hostage to political ideology and not economics).
I have personally said for some time that I wouldn’t be surprised if RE stays below its most recent peak value in REAL terms for decades or maybe even my entire life. but nominal terms? who can say. nominal RE valuations can clearly go up if monetary inflation is out of control.
lastly: his comments clearly jive with our leaders. Clearly part of our govt’s policy is to try to inflate away the dollar’s value, which makes nominal debts easier to service for the masses (if only the masses could get increased nominal wages…) Thus, Shiller is only saying what many economists are thinking:
“If we had inflation, it’d be great, because it’d mask a 25 percent decline.”
indeed.
Should be a fun ride down.
Just like LinkedIn stock.
As high as 122.7 a mere three weeks ago, it’s now at 72.
Someone who could have afforded a $2M home three weeks ago with their LNKD stock can now afford a $1.2M home.
Oh well. I guess prices will need to fall.
psssssst….RENT!
Inflation would also lighten the load of my fixed rate mortgage. Bankers would not be happy, and I hate to see them cry.
Yes, it would surprise me. I don’t think the US housing bubble was ever as dramatic at the real estate bubble (and general economic bubble) in Japan. Furthermore, there are/were demographic forces at work in Japan (falling/aging population) that are not at work here. In many areas home prices have already fallen below replacement cost–that is, you couldn’t build a home for what it is currently selling for. As long as we have new household formation and population growth, that can’t last. The market will eventually absorb the existing supply and begin to drive prices up as new housing must be built.
One more thing. I’m interested in what’s happening to our north. In Canada, they haven’t yet had a collapse. Prices in Vancouver look like 2006 Bay Area prices. I doubt that disparity will persist either. Either they’ve gotta come down or we are pretty near our bottom and will begin to rise (no, I’m not predicting a return to pre-crash levels anytime soon–just modest appreciation rather than depreciation).
Canada is a different animal, Vancouver in particular. Canada benefits from the commodity bubble and therefore enjoys more growth than us. This wealth only has very few places to go locally, and Vancouver is one of the most popular investment areas. Also, some foreign money is involved.
The bubble burst in the US went through a very logical path. We reached the limit of where prices could go with the cost of money (we even had neg-am!). Less buyers meant prices stagnated, which put a stop to the big Ponzi scheme. Increase in supply (distressed sales), further compounded by decrease in demand (unemployment + financing restrictions)) were the natural path to this correction/collapse.
Maybe Canada will follow a similar path. Maybe not.
BT,
I do not think you can compare the Canadian market to the US. There are only 5-6 major banks in Canada and the govn’t there did not allow these banks to market all the no money down mortgages to their customers unlike the US situation. In Canada, when buying a place your financial health is vetted and downpayments are required – typically 20%. Plus the Canadians cannot write their mortgage interest off their taxes. Most Canadians buy a home and try to pay off the mortgage as fast as possible in order to reduce their interest charges. My family and friends are paying them off in 15 years or so. They do not look at moving every five years unless their job relocates. The housing boom in Vancouver and Toronto has to due with jobs, limited land, desire to live in a great city and immigrants/investors. It is like the situation in New York and San Francisco where housing prices are more than say Kansas.
g-dub wrote:
In the thread on Chairman Bernanke’s speech at the International Monetary Conference, tipster wrote “The average voter…is more influenced by the local baseball team or the gossip magazines than anything that might affect him or her economically because he understands the first and not the second” and I think that sentiment applies equally here. I’d bet money that the average American consumer doesn’t know who Robert Shiller is at all and probably could tell you that they’d heard Ben Bernanke’s name before, but couldn’t tell you what his job is.
But you could survey the same people who were clueless about those two questions and I personally think they could tell pollsters all kinds of details about what happened last night on Dancing with the Stars or The World According to Paris.
That said, you’re not alone in your worry that “the market” can be talked down or talked flat and folks whose livelihoods depend on the housing market share your view that words matter. From the New York Times’ article at the end of last month, Bottom May Be Near for Slide in Housing, which obviously preceded the above-linked Bloomberg piece:
Emphasis added. I guess The Times contacted Shiller just a little too early since Bloomberg has the report on U.S. home prices plunging to their lowest level since 2003 as coming out on May 31.
“Seems like a lot of analyst double talk”
I’ll chime in here as well and reiterate that inflation is a very real phenomenon. If you have more dollars, but they buy you less stuff then you are not better off.
“Yes, it would surprise me. I don’t think the US housing bubble was ever as dramatic at the real estate bubble (and general economic bubble) in Japan.”
If you look at Shiller’s long term house price graph, the recent bubble was quite large. Looking at the size of the peak over the trend, I don’t think a 10-25% undershoot would be that surprising.
“As long as we have new household formation and population growth, that can’t last.”
Firstly, an undershoot need not be permanent. Irrational fear is just as possible as irrational exuberance. Secondly, if you look at total excess supply including second homes, which can be sold off due to economic necessity, and average household size vs historical highs, you can see that we could pack in a great deal more people in the sq ft that we currently have built out.
Additionally, note that replacement cost is not fixed.
With high supply and low demand replacement cost can drop as there is less demand for inputs such as land, materials and building trades labor.
Additionally, recent historical average costs can be skewed by quality factors. During a boom you can have higher average costs since the average quality goes up. (i.e. everybody wanted granite counters and stainless steel appliances,…). This may not represent the minimum acceptable quality in less flush times.
Japan and USA are two very different market. First of all, Japanese single family homes are built to last only about ten years. If you buy a house in Hokkaido today, ten years from now it will need to be torn down and rebuilt so of course it will go down in value. Ever wondered why investors buy land instead of homes in Japan?
Second, it’s impossible to borrow unless you’re a citizen or a permanent resident. Not every foreign investor come with boats load of cash you know, imagine how many investors were turned away.
Faced with these conditions, it’s only natural for housing to keep sliding. A house over there is not an investment, it’s a consumption.
@beb0p — Given the trajectory of land prices from the Japanese Ministry of Land below I’m not sure your conclusion is accurate.
http://tochi.mlit.go.jp/english/6-05.pdf
Given the concordant stagnation in Japanese stock prices and currency deflation, I think there is much more evidence that Japanese home price declines were mostly economic in nature rather then due to poor construction.
Regarding the unwillingness of Japanese banks to lend to foreigners, note that were Japanese land an attractive investment foreigners need not borrow from Japanese banks. Additionally during the boom, Japanese banks were quite liberal with their real estate investment activity. The poor performance of these investments created a class of “Zombie Banks” which extended the duration of the crisis.
houses in japan last only ten years?
they should all move into corollas – they last longer.
The only Japanese houses that typically lasted ten years were those built around 1935 in large urban areas.
Lol MoD, black humor at its best.
Shiller was on NPR earlier today…I was not very impressed. He really hedged everything to the point where what he was saying was frankly meaningless. I.e. Housing prices could go up, down or remain the same. What a genius!
“Lol MoD, black humor at its best”
Agreed. I tried not to laugh at that one….but it was kinda funny 😉
I didn’t say it’s ALL on the construction and the red tape for the housing downturn, for sure the economy has a lot to do with it too but the things I expounded certainly made housing in Japan much worse than otherwise.
If houses in SF only last a couple of decades max and discourages foreign investment then it would be a whole different ballgame here. Gives new meaning to “the value is in the land.” When my friend wanted to get a loan to buy a place in Japan you know what he was advised the first thing he should do? Change his name to a Japanese name because lenders don’t take well to foreign names on the application. Classic. Would you buy in that kind of environment?
When I say a house last ten years in Japan, the first ten years are the commonly accepted period of a house in reasonable usefulness. Past that point, the house generally is in a rapid state of decline; note that many residents do stretched out the life span to twenty years.
This is what I’ve found on Wiki:
“An unusual feature of Japanese housing is that houses are presumed to have a limited lifespan, and are generally torn down and rebuilt after a few decades, generally twenty years for wooden buildings and thirty years for concrete buildings.”
http://en.wikipedia.org/wiki/Housing_in_Japan
I know, Wiki is unreliable. But many Japanese had echoed the same.
It seems like it is cheaper to own rather than rent these days. Was just told my modest but well maintained and located Oakland bungalow would rent for at least $3k a month – would be lucky to sell at $400k. With the low rates these days, mortgage, taxes and insurance would probably be under $3k, not taking into account tax deduction effect for mortgage interest and property taxes.
“It seems like it is cheaper to own rather than rent these days.”
That is the natural order of things — it should cost less to own than to rent for a variety of factors. However, it’s not universally true throughout the Bay Area that it’s cheaper to own than rent. Where in Oakland?
in the hills above south end of 13 – country living with city convenience
“When I say a house last ten years in Japan, the first ten years are the commonly accepted period of a house in reasonable usefulness. Past that point, the house generally is in a rapid state of decline; note that many residents do stretched out the life span to twenty years.”
Given the land price chart above, to find this convincing I’d want to know when this 20 year practice came into effect. If it was a long standing practice existing during both the boom and the bust any effects would seem to cancel out. If it came into practice post bust I’d want to think about issues of cause and effect. As I mentioned above during a boom build costs and quality can rise as people demand it. In the ensuing bust cost and quality can drop as a result of the bust simply due to affordability.
Additionally, I’d want to look at how material the 20 year replacement cycle was compared to US practices. Specifically comparing the US costs of 20 years of maintenance and updates vs a Japanese system of 20 years of degradation with a lump sum rebuild. Given that pre-boom median US house prices were in the $100k range, some of which was land cost, it wouldn’t take much to have costs equivalent to a chunk of the structure value over a 20 year period.
“I.e. Housing prices could go up, down or remain the same. What a genius!”
It’s really not meaningless to try and think through lower bounds for something like housing prices.
Many mistakes were made in the crises by people thinking that national home prices *could not* fall for a sustained period. Which implicitly is a lower bound of -0%! Having someone knowledgeable like Shiller actually think through a lower bound rather then implicitly accept one (like -0%) seems fairly useful.
Based upon the sheer amount you post on here, tc_sf, you might think about learning the difference between “than” and “then.” Make a note.
Housing prices are not an independent variable. If the job market stays bad, they will tank. We have some spots of cheer in our local job market – this will help certain parts of the housing market, but not all. Especially the 700K to 1.2 mil portion. Marginal neighborhood values still have a long way to fall.
Thanks for the humor compliment but I wasn’t trying to be funny. Interesting info that bebop brings up about the average life span of a Japanese house being twenty years. I wonder the short life of houses is a combination of shoddy post-ware reconstruction combined with their RE boom (making it worthwhile to tear down and rebuild).
I can think of a lot reasons why prices should go down.
1. Decreasing number of people who can afford to buy (or rent for that matter). Falling real wages over the past X decades. Pesky globalization and income ineqality.
2. A house detoriates 24/7. The physical structure is worth less with each passing second (that pesky entropy).
3. National savings rate is basically 0 %, right.
4. Over supply of housing courtesy of the Bubble.
5. Advances in building/construction technology (can I get a witness, tech workers).
6. Well odered markets driving out intermediate costs and inefficiencies (had to throw a bone to the bidness elites).
7. Everyone knows someone that can’t make the payments on their house… a very scary feeling.
Will location save the day in American cities and keep prices afloat? Hardldy:
1. Wonderful public realm present? No. Parking issues take up 50% of plannng meetings.
2. Sparkling infrastructure? Civil engineers gave us a barely passing grade.
3. Kick butt school system? Umm…no. Investing in the future is so…yesterday.
4. Friendly and interesting people present. Well…yes! Lots of nice people. But folks are a lot happier when there are good schools, it’s easy to get around town and they have a job. It’s not rocket science…
Mr Schiller is right prices will continue to fall as more people face reality; economics is after all, a social science…
One can’t generalize about these things. But the dummies always try.
One can’t generalize about these things. But the dummies always try.
“He should realise that his words are powerful and don’t help the situation.”
If he’s accurate, then he’s helping the situation. He’s warning people and pointing out a risk that people ought to plan for.
Don’t shoot the messenger.
“It seems like it is cheaper to own rather than rent these days. Was just told my modest but well maintained and located Oakland bungalow would rent for at least $3k a month – would be lucky to sell at $400k.”
Edward: I think someone has been telling you lies. I own rental property in Oakland and precious little is renting for anywhere near $3000. (Unless you are renting a large home (i.e. 4 bedrooms) in Rockridge, Lake Merritt or Crocker Highlands.)
And if your home is truly only worth 400K, $3000 in rent is extremely unlikely. (Unless of course the prospective renters are planning on growing pot which is very common in Oaksterdam…)
Dr. Shiller is one of the villians of this recession. His index is flawed to show and create volatility. His motivations are driven by fame and fortune, and banking on proving he can drive the market down at will.
I do a radio show today live at 4pm on WABC in New York and will talk about this. Anyone with a contrary opinion want to come on the air and hash it out? If so email me at greg@ownamerica.com.
Yeah, you really have to watch out for people with an agenda(like trying to sell you something)…
I look to AM talk radio for all the best insights on complex phenomena. They make things so easy to understand. You see, everything is caused by an evil villain that is out to get us. The solution is to buy guns, gold, and flags.
I have a golden gun. When you pull the trigger a little flag with “BANG!” written on it pops out of the barrel.
That plus size 21 clown shows makes me fully prepared for the economic apocalypse.
Shiller has been a pretty good housing prognosticator but a poor stock market picker. He told everyone to get out in 1996 and predicted a decade of flat prices. That was when the S&P 500 was at 600. A decade later it was at 1200.
The timing of his book Irrational Exuberance was pretty good though, I have to admit.
Has he ever been anything but bearish? He would be more believable if he occasionally predicted that prices would go up. Right now he uses some crazy 10 year rolling average P/E to claim that the stock market is over valued, but if he used the actual P/E he would see that it is pretty close to the average value over the last century.
“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.”
It is nice to see the experts coming around to my point of view, they still need to really get inflation going though. The Fed has done a good job of holding off deflation, but they are going to have a tough time getting 5% inflation going if the Federal government is hell bent on an austerity budget. Just look at Ireland to see what that gets you after a housing bust.
Clown shoes! Man, my apocalypse kit is so downmarket. I have to spice it up a bit.
Definitely a tangent, but I had to respond. The federal government has no interest in an austerity budget, it’s all politics. The debt ceiling will be raised, the deficit will continue to grow massively. It’s just scoring political points for the time being.
Have no fear, inflation will kick in soon enough. Deflation is pretty easy to fight, throw money at it. Inflation is much harder to stop, you have to raise interest rates, and nobody really likes that. When you have a strong currency and stable economy it’s doable, but with the current situation, inflation will be very difficult to control when it fully kicks in.
lyqwyd, I think you are absolutely right on the politics/austerity question. But I disagree with your point that deflation is easy to fight. It can create a vicious cycle of spending declines that is extremely hard to break even with scads of money thrown at it (see Japan) — that is why the Fed was terrified of letting it get a toehold. Inflation can be a bear to combat too, but deflation is worse.
Inflation can be trivially generated by printing up money and handing it out to the people.
Printing up money and handing it out to the banks accomplishes nothing to create inflation if there’s nothing worthwhile for them to make loans on.
@A.T.
Perhaps easy is not the correct word to use regarding fighting deflation, but I think inflation (or more accurately too much inflation) is harder to fight than deflation, particularly in the current economic environment. There is very little constraint preventing the government from creating more money, which is the solution to deflation, while there are some very large constraints to raising interest rates significantly if inflation gets out of control (which I believe it will).
@diemos
There are many ways to create inflation other than simply loaning out money. In my opinion the only way inflation does not happen when banks are given money is if they simply increase their reserves and do nothing else with the money.
QE2 showed 1 way how inflation can happen without direct lending by banks: speculation. Many commodities are up 25-100% since last year.
On one side, since those are either directly consumed by people (agriculture) or the goods they purchase (base metals & plastic) it ultimately leads to higher prices. On the other side, the speculation by financial companies results in money flowing into the commodity producers, which then winds up in the hands of employees & investors, who then spend the money into general circulation.
“Right now he uses some crazy 10 year rolling average P/E to claim that the stock market is over valued, but if he used the actual P/E he would see that it is pretty close to the average value over the last century.”
The 10-year average P/E isn’t so crazy. The idea is to smooth out bumps like the recent bust, where companies reported low earnings in some quarters (92% lower for the S&P 500), then promptly cut expenses in following quarters so that earnings were higher. However, that had very little to do with growth in the actual business in many cases.
What CAPE attempts to tell you is not where stocks will go in the near future, but what your expected return from stocks might be in the long-run. If the stock market is overvalued, then your expected return should be lower over the long-run, but that doesn’t mean the stock market couldn’t go up 20% in the near-term.
@ NoeValleyJim — In my opinion Shiller doesn’t really put himself out there as a prognosticator. He did some great historical work looking at housing prices going back far before the current crisis. He also put some great analysis metrics out there like his eponymous index and the CAPE. But one of the themes of his behavioral economics work, such as Irrational Exuberance, is that prices can irrationally deviate from valuations for quite a long period of time.
“Just look at Ireland to see what that gets you after a housing bust.”
While I’m not sure the pain is over here in the US, I don’t think our current situation is intrinsically disastrous. Countries like Ireland, Iceland and Grease are in much worse situations and I’m not sure their experiences with austerity would mirror ours.
“But one of the themes of his behavioral economics work, such as Irrational Exuberance, is that prices can irrationally deviate from valuations for quite a long period of time.”
This is correct. If you look at CAPE, for example, there are long periods of time where CAPE will be well above long-term average. That’s why it’s about long-run return, not about where will I be tomorrow.
Just caught up on a NYT piece that Shiller just did talking about the role of behavior and expectations in the recent bubble.
“Professor Case and I have conducted annual spring surveys of home-buyer attitudes for many years. We ask about long-term expectations: “On average over the next 10 years how much do you expect the value of your property to change each year?”
The survey we conducted in spring 2005, near the end of the bubble, included 407 home buyers. In it, the median expectation for home price appreciation over the next decade — until 2015 — was 7 percent a year. That is substantially less than the 10 percent a year that Americans had recently experienced.”
[…]
The mood is far different now. Our latest survey, covering April and May of this year, included 296 home buyers, and their median expectation for annual home price appreciation over the next decade was down sharply, to just 3 percent. And, in comparison with the 2005 results, few people had extravagant expectations.
”
“Even for people who have other reasons to buy a house, there may be little urgency to do so. Our 2011 survey found that the median expectation for home price appreciation next year is just 1 percent. So it won’t be surprising if new home sales remain abysmally low and few jobs are created in the hard-hit construction industry.”
http://www.nytimes.com/2011/06/12/business/economy/12view.html