Yale Economist Robert Shiller Offers a Read on the S&P Case Shiller Home Price Index
Tuesday, June 26, 2007SUSIE GHARIB: Those weak home sales are forcing sellers to lower prices. The closely-watched S&P Case Shiller home price index showed prices in Boston, Chicago, Washington, DC and seven other major markets were down 2.7 percent in April compared to a year ago. Darren Gersh spoke with Yale economist Robert Shiller, one of the creators of the index, and asked him just how bad the spring home-selling season was.
ROBERT SHILLER, CHIEF ECONOMIST, MACROMARKETS: Well, we saw quite a drop in what we see in home prices fall. We've seen existing home sales fall. We've seen new sales fall. Residential investment as a fraction of GDP has plummeted. It was 6.3 percent. Now it's down to 5.1. So it's a significant weakness. I think it reflects the unwinding of the psychology that has driven a boom psychology in the housing market.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: You're pricing index shows that prices have come down in some cities quite a bit, but we also are seeing that inventories have come up. They're now at a record of about 9 months. What does this say about the prospects going forward? Are we at the beginning of this correction or towards the middle?
SHILLER: First, the answer differs by city. I'd like to talk about the country as a whole, but if you look at cities, they just successively go through boom and busts periods at some what different times. But I think that the high inventories are a reflection of the general weakness in the market and it's a psychology that's weakening. People a few years ago thought that housing was just the best investment and they didn't want one. They wanted two or three and that was driving a boom market and that general psychology is starting to weaken.
GERSH: So in major cities, how much further do you think prices have to fall?
SHILLER: In cities that have gone up a lot the boom cities, remember the prices doubled even in real terms in many cities. This boom has been going on for close to 10 years. And we've seen successive years of big price increases. People are starting to build it in. They have been (ph) starting to build it in and this is just the way it is. Real estate goes up 10 percent a year but that I think is wrong and I think we may see a substantial correction. We already have. Detroit is down 16 percent in real terms from its peak. Boston is down 12 percent in real terms from its peak. San Diego is down 11 percent and they appear to be continuing to go down so there's no sign it's over.
GERSH: But even though there's no sign that it's over, can you make a guess as to whether or not we're far along in this process? Do we have another year to go, two years to go? How long is still unwinding going to take?
SHILLER: It's inherently difficult to predict speculative markets. One sign of optimism I see is that prices have been going up in Boston now for a couple months. Boston was one of the first to peak. Home prices peaked in Boston in September of 2005. It's going on two years ago and they're down as I said, 12 percent in real terms. So now that we see pick up, it's possible that the cycle is coming to an end in Boston. Boston is kind of a leader. It was one of the first cities to boom. It peaked early and could be turning around. But I still give more credence to the scenario that it'll keep going down even in Boston.
GERSH: From your figures, can you tell if there are a lot of people who are still under water in their homes because we hearing a lot of people are going to need to refinance in the next couple years. Will they be able to do it?
SHILLER: Loan to value ratios have gone up. The lending standards were weakened in the boom period and so there are people who are under water for sure. Moreover, adjustable rate mortgages were often issued in the very low-short rate period when the term structure was often sloping a few year ago and in some cases, I think home buyers overreached. That's part of what drove prices so much and now they've got an expensive home and they're seeing their mortgage rate ratcheted up so I think that we will see problems, continues problems.
GERSH: So it sounds like the outlook is looking pretty tough there. Robert Shiller, Yale professor of economic and also chief economist for Macro Markets. Thank you for your time.
SHILLER: OK.
