They don't call it the dismal science for nothing

Robert Shiller, Yale economist, who predicted the housing bubble attempts to look into his crystal ball in this interview with analyst Henry Blodget.

Shiller: It's the biggest [housing bubble] in world history. We are entering a new era.

[snip]

Blodget: Just to clarify that, because I think that's probably shocking to a lot of people, you're saying that we're [only] halfway back down to effectively fair level.

Here's Shiller's quantitative analysis of long-term housing values (inflation-adjusted) from which he bases the above estimate.




What many people don't often realize is that housing per se isn't actually historically a great investment in terms of value appreciation. People tend to underestimate the cost of the home improvements that they make along the way and of course inflation boosts the nominal perceived value upon resale.

But, home ownership mostly creates a backdoor savings plan via the payments made on the mortgage principle, and thus has served as an important vehicle for middle class wealth accumulation as a side effect of the slow increase in equity over time. That was, of course, when people were actively looking forward to paying off their mortgages (i.e. neighbors used to hold "mortgage burning parties" once they had paid in full) instead of pulling out the increased paper equity value via home equity loans and lines of credit.

Now, obviously, housing is a highly locale-specific product. So, even if Shiller is correct in aggregate, there will be some areas that are not as bad, but that also means there will be others that will be even worse.

Via Bloomberg:

It has taken Susan Erb just three years to see the value of her Merced, California, home plunge by more than half to $350,000. Next month, her mortgage payment jumps 20 percent to $3,321 and she knows she can’t afford it. Her bank won’t rework the loan unless she stops paying altogether.

[snip]

Merced, the epicenter of the U.S. foreclosure crisis, demonstrates the steep challenges President Barack Obama will face in trying to stem defaults. One in 59 housing units in the Merced metropolitan area received a foreclosure filing in January, the highest rate in the U.S., according to RealtyTrac Inc., an Irvine, California-based seller of default data. For- sale signs are everywhere and a building boom fueled by subprime mortgages has been brought to a standstill. Just 16 construction permits were issued last year. In 2005, there were 1,427.

“We’re ground zero,” said Merced Mayor Ellie Wooten, 75. The city, population 81,000, had an unemployment rate of 15.5 percent in December, “and it’s going to get worse,” she said.

One of the key metrics that is always useful to look at is rent comparison. At a basic microeconomic level the "value" of the house has to be correlated to the monetary stream of payments that someone is willing to pay to live in it (or similar accomodations). So, if house rents in the area are far below the average mortgage payments, there is an economic incentive to rent rather than buy. And, this economic reality will continue to place downward pressure on prices until they come into balance.

Rents (and therefore housing prices) get bid up either when a) the area population increases or b) the average wealth of the citizens increase, since both place upward pressure on prices.

By contrast, in a separate article I have read that there are welfare recipients living in some of the above-noted Merced McMansions because the rental market there has fallen so fast with so much foreclosed housing on the market. And, anybody that owns a home there, even if they weren't personally irresponsible, is going to get hurt badly by all this.