The housing market may continue to see declines throughout this year, and may finally bottom at a level that is about "50 percent of its peak from early 2006," says Yale professor and housing economist Robert Shiller.
As measured by the Standard & Poor’s/Case-Shiller Home Price Indices, housing prices have plummeted nationally more than 40 percent in real inflation-adjusted terms in some major cities since the peak around the beginning of 2006.
Nationally, the decline is more than 25 percent. Another 15 percent drop is coming this year, said Shiller.
"Why are we seeing such big price drops?" Shiller asked, rhetorically, in his syndicated column. "The boom in the world’s housing markets and stock markets between 2003 and 2006 was caused by the idea that investments in homes and equities are a sure route to wealth."
"It had become an article of faith that the value of both types of assets only goes up in the long run, and that it is foolish to try to 'time the market.'"
Shiller said economists sincerely believed that interruptions in this upward trajectory could only be small and transient.
"People seemed to think that rapid appreciation in these markets had become a universal constant, like the speed of light," Shiller added.
This belief was spread by the "world culture" created by the Internet, so it was shared globally, not just in the U.S. and in the U.K., which have historically had a shared culture.
But, after the market peaked three years ago, lenders tightened their standards.
When buyers found it difficult to finance home purchases, sellers had to trim the asking price. This sort of tightening has been seen before in economic fluctuations during the last two centuries.
"The boom just before the depression of the 1870s sounds a lot like what happened just before the current crisis," said Shiller.
"People will believe many things if they have the impression that the rich and famous believe them, too. But their belief can suddenly be disrupted if plainly visible events contradict it. That is what is happening now, and 2009 will shape up as a year of even more profound disenchantment."
Some economists, however, disagree with this gloomy forecast, and see upside to the current downturn, especially now that interest rates are at historic lows.
"For those who could refinance, December offered an amazing chance to save some money," writes economist Mark Lund of Stone Creek Wealth Advisors, in a research note published Tuesday.
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