Shiller: Home Prices May Keep Falling

• June 8th 2009

by Mark Wellborn

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Robert Shiller’s name rarely shows up in the byline field of one of the country’s largest newspapers, but when it does, people take notice. The New York Times’ most popular business article this weekend was a piece written by the Yale economics professor and co-founder of the Case-Shiller Home Price Index about how home prices may keep falling for the foreseeable future.

Shiller makes the case that extended declines in real estate prices are common, and regardless of the good news that has come out in recent weeks (rise in pending home sales), he notes that the price decline for residential properties in the U.S. continues.

The reasons for this are outlined in Shiller’s article, which we consider a must read, but here is a brief excerpt that illustrates the economist’s thinking:

“Imagine a young couple now renting an apartment. A few years ago, they were toying with the idea of buying a house, but seeing unemployment all around them and the turmoil in the housing market, they have changed their thinking: they have decided to remain renters. They may not revisit that decision for some years. It is settled in their minds for now.

On the other hand, an elderly couple who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it’s finally the time to do so. It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again.

As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply — and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011.”