Yale University Economist Robert Shiller, co-founder of the Case-Shiller Home Price Index (pdf), has some sobering analysis for home owners and potential home buyers.

Home prices, which have fallen for about three years, are likely to continue to decline for some time, Shiller wrote in an op-ed article in The New York Times Saturday.


Further, don't look for historical precedent to provide evidence of a quick snap-back in housing prices, Shiller said. The last housing sector boom, which ended about the time of the 1990-1991 recession, did not see home prices start moving upward until 1997 -- six years later.

2010: Another tough year for home prices?

Even the federal government has projected home price declines through 2010, with total falls above 40 percent in many U.S. markets -- statistics that seem to defy both common sense and the traditional laws of economics, Shiller said. If housing markets were rational and efficient, people would sell earlier in the cycle, prices would drop fast, and the housing market would recover quicker. Why hasn't that occurred?

Shiller says something is definitely different about real estate: Long declines do happen with some regularity. One reason: Unlike stocks, many home sellers are not really "leaving" the market -- they're likely to buy another home, so there's no "speculator's urgency" to sell a home.

Family factors also delay sales, and by extension, increase market inefficiencies in the housing market. A family may own a house in a neighborhood where home prices are declining, but that neighborhood also may have a great school system for their kids, and that can delay sales.

But the major factor, Shiller points out, is couples' expectations about the future health of the economy. Consider the case study of the proverbial young couple renting an apartment. Three or fours years back, the idea of buying that first home, condo, or co-op was a logical step, and it made sense to proceed with it soon: The U.S. economy was growing, and prices were not likely to be lower in a year.

Today, that same couple sees a pronounced U.S. recession, rising unemployment, some green shoots in the U.S. economy -- but nothing that rivals the Doughboys returning home to the states at the end of World War I that set in motion the "Roaring 20s." That young couple has decided to continue renting, Shiller says, and they may not revisit that decision for several years.

Originally greeted by Wall Street with a shrug, S&P/Case-Shiller home price data rose to market-mover status in 2008 as it became clear that the United States' housing boom of the past decade was, in fact, a bubble fueled considerably by mortgage market excesses, from borrower to lender. The bursting of that bubble triggered record home mortgage foreclosures and mortgage-backed securities defaults (toxic assets), which led to the financial crisis that the U.S. and world are still trying to end today.

As a result, investors, economists, homebuilders, and homeowners alike now closely monitor Case-Shiller home price data in order to discern clues as to when the housing slump may end -- a recovery that historically has contributed to U.S. GDP growth.

Economic Analysis: The most recent Case-Shiller Home Price Index indicated a 19.1 percent year-over-year median home price decline in Q1 in 20 U.S. cities, but there were signs that the rate of price declines was slowing (pdf). That was seized on by the economic bulls as a sign of housing sector stabilization, and they are correct.

However, as Yale University's Shiller points out, slowing price declines is not tantamount to a resumption of rising prices, and there is ample historical precedent that, given poor economic conditions, prices could fall for much longer than the three down years the sector has already registered.

Obviously a factor, or tailwind, that would refute Shiller would be a U.S. economy with robust growth: the economy is not close to that condition, so the rule of the thumb for potential home buyers is tread cautiously. In many U.S. markets, if you buy now, you're buying into a soft market where there is a substantial risk of further price declines for at least another year.


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