Economist, author and Yale University Professor Robert Shiller warns that dismal housing and employment data suggest the economy is at a tipping point where a double-dip recession is possible and home prices could have much further to fall.
Shiller said the recent uptick in unemployment isn't yet enough of a sign as to which way the recovery is heading. But if unemployment continues to rise in the coming months, it could suggest another recession. "Whether we call it a double-dip or not, I think there is a risk," Shiller told Reuters Insider in an interview.
Likewise, data showing U.S. home prices fell into a double dip in March could prove to be either a seasonal effect over the winter months or part of a downward trend.
"My gut feeling is we might see a continuation of the decline (in home prices)," Shiller said. He added that a 10 percent to 25 percent slump in home prices "wouldn't surprise me at all," though he cautioned that wasn't a forecast.
Shiller pointed to the glut of unsold homes on the market and the large amount of homeowners under water on their mortgages as pressuring prices.
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“There’s no precedent for this statistically, so no way to predict,” Shiller said today at a housing conference hosted by Standard & Poor’s in New York.
A model for the U.S. may be Japan, where home prices fell for 15 years, said Shiller, the co-founder of the S&P/Case-Shiller home price index.
“They lost close to two-thirds of their value,” Shiller said. “Then they went up for one year in 2006 and then they started going down again.”
Forecasting home prices is impossible because there’s no historical precedent for the real estate bubble of the 2000s and the subsequent price drop, Shiller said.
“In real terms, there has never been a bust of this proportion,” he said.
“Even in the Great Depression, home prices fell nominally approximately almost as much as they did recently. But that was with all prices falling. So real estate prices didn’t go down hardly at all during the Depression.”
Shiller said recent data showing U.S. home prices fell into a double dip in March could prove to be either a seasonal effect over the winter months or part of a downward trend.
U.S. home prices plunged 33 percent in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to a Case-Shiller report on May 31. The decline signaled a double dip as the index fell below its previous post-housing-bubble low set in April 2009. Prices more than doubled from 2000 to July 2006.
A backlog of foreclosures poised to hit the market means prices may stay depressed, dissuading builders from starting new construction. Unemployment, which rose to 9.1 percent in May, and stricter lending conditions are signs that any recovery in housing may take years.
Shiller’s comments paint a more pessimistic possibility for home prices than other forecasts. Additional declines will be “incremental,” Bank of America Corp. (BAC) Chief Executive Officer Brian T. Moynihan said on June 1.
While it would be a surprise to see prices fall steeply, it’s possible for homes to lose more value if inflation picks up, said Karl Case, co-founder of the index.
“You could have flat nominal prices but still have it go down 20 percent,” Case told Bloomberg at the conference. “If house prices stabilize, they could still go down in real terms. If we had inflation, it’d be great, because it’d mask a 25 percent decline.”
Meanwhile, other experts have also been warning of a bleak U.S. economic future:
• Investor guru Jim Rogers said staggering debts and loose monetary policy is going to send the United States into a financial crisis worse than the one in 2008. "The debts that are in this country are skyrocketing," Rogers tells CNBC, adding "in the last three years the government has spent staggering amounts of money, and the Federal Reserve is taking on staggering amounts of debt."
"When the problems arise next time…what are they going to do? They can't quadruple the debt again. They cannot print that much more money. It's gonna be worse the next time around."
• Economist Martin Feldstein says the economy is far worse than most people realize. "The policies of the Obama administration have led to the weak condition of the American economy," Feldstein writes in The Wall Street Journal. "The administration's most obvious failure was its misguided fiscal policies: the cash-for-clunkers subsidy for car buyers, the tax credit for first-time home buyers, and the $830 billion 'stimulus' package," he said.
• Rochdale Securities banking analyst Dick Bove says the Federal Reserve could throw the country back into recession through its quantitative easing program and by calling on banks to raise more capital. Quantitative easing, known widely as QE2, a $600 billion bond buyback designed to spark economic activity, has inflated assets such as stock prices but has failed to make serious improvements to the overall economy.