Shilling: Home Prices Will Drop 20 Percent as Bond Rally Will Survive

While some analysts see recent improvement in some housing data as evidence a sustained recovery has begun, independent economist Gary Shilling doesn’t share that view.

“I still think we have a 20 percent decline in store, because of the huge overhang of inventories, some of them stated and many hidden,” he tells Yahoo.

Shilling’s comments were backed up by Friday’s news that new home sales fell 1.6 percent in February to a 313,000 annual pace, the slowest since October.

The five big mortgage servicers held off on foreclosures until their recent $25 billion settlement with the government, hoping to avoid further public relations damage, Shilling says. “Now we will go back to foreclosures.”

And that distressed selling will mean another leg down in prices, he says.

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Shilling also scoffs at recent predictions that the 30-year bull bond market is over. “I still think we’re probably more headed to deflation than inflation,” he says. “The world is going to see a lot slower economy, if not recession. Treasurys are going to be their usual safe haven.”

The 10-Treasury yield will like drop to 1.5 percent from 2.24 percent recently, Shilling predicts.

Even some banks, which have a vested interest in strong housing, aren’t very optimistic. “There are signs of life in the market in certain regions, but we're not seeing a broad-based recovery,” Michelle Meyer, an economist at Bank of America, tells Bloomberg.