Shilling: Housing Prices Will Plunge 20 Percent More

Friday, 27 Apr 2012 01:10 PM

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Housing prices will drop by a further 20 percent as the downturn gripping the United States deepens, leading economist Gary Shilling says.

Writing in the Christian Science Monitor, Shilling said more and more people are looking to rent as homeownership becomes increasingly rare.

“Housing activity remains depressed, with the only life coming from the multifamily component, which is being driven by the zeal for rental apartments as homeownership falls,” he wrote.

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“Homeowners are losing their abodes to foreclosures; many can’t meet stringent mortgage lending standards; some worry about homeownership responsibilities in the face of job uncertainty; and many people have no desire to buy an asset that continues to fall in price.

“I am looking for a further 20 percent slide in housing prices.”

Shilling’s article appeared just as tracking firm CoreLogic reported that more than 1 million Americans who have taken out mortgages in the past two years are already “underwater” on their loans – owing more than their home is worth.

“Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America,” Reuters reported.

CoreLogic predicted that the housing market will bottom out this year, however a survey by Gallup Thursday showed that homeownership levels have fallen to 62 percent, the lowest since the polling group started monitoring the subject in 2001.

Shilling – whom Forbes referred to on Friday as a “perma-bear” – says the Federal Reserve's view of more U.S. growth ahead is distorted.

Bullish investors point to a 25 percent rise in the S&P 500 index from its October 2011 low, but "consumers, not investors, set the tone for the economy," he wrote.

"On the consumer side, the risks are tilted toward the downside."

Even though strong consumer spending has fueled the economy, the pace does not appear sustainable, said Shilling.

"Personal income growth continues to be weak – up just 0.2 percent in February – meaning this recent exuberant consumer spending is being fueled largely by increased debt and further dipping into savings," says Shilling. "Real household after-tax incomes declined in February for a second straight month and have gained a mere 0.3 percent year over year."

"Consumers still face high personal debt levels."

Shilling, whose latest book is “The Art of Deleveraging,” has long been downbeat about the economy. He has predicting a 2012 recession for the past six months and earlier this month suggested the S&P 500 will plunge to around the 800 mark, a drop of 43 percent.

In his article in the Monitor, he pointed out that consumer spending is the only major source of strength in the American economy this year.

“On the other side of the scale several weaknesses are piled up: State and local government spending remains depressed by deficit woes and under-funded pension plans; excess capacity restrains capital spending; and recent inventory-building appears involuntary,” he says.

URGENT: 'The Final Turning' Predicted for America. Hear Testimony!

“So it should not come as a surprise if a consumer retrenchment tips the balance toward a moderate – and overdue – recession.”

Shilling said it is easy to say things are looking up, following the Federal Reserve’s economic growth forecast and at a time when the stock market is rebounding.

“But consumers, not investors, set the tone for the economy,” he said. “On the consumer side, the risks are tilted toward the downside.



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