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Posted at 11:30 AM ET, 12/29/2010

Gary Shilling: Housing prices may still have 20% to fall

By Ezra Klein

the-bottom-line-house-prices-probably-have-another-20-to-fall.png

Gary Shillings's overview of the housing market -- which is based on an impressive 39 charts -- is about the clearest and most comprehensive I've seen. It's also the grimmest. "The bottom line," he says, is that "house prices probably have another 20% to fall." And that may be a "conservative estimate," as asset prices have a tendency to get too high when they're booming and too low when they're busting.

If Shilling is right, this'll be a big drag on the economy in 2011. And it helps explain why House Republicans are rapidly backpedaling from their once-cavalier confidence that Fannie and Freddie can be swiftly privatized and spun loose. Where the housing sector had a lax -- and occasionally fraudulent -- attitude toward lending and appraisal in the run-up to the bubble, they've tightened considerably since the bust. So considerably, in fact, that basically the only mortgages that are moving are those that Fannie or Freddie are willing to buy:

and-dont-forget-that-we-now-have-much-tighter-lending-requirements-so-much-so-that-fannie-and-freddie-and-fha-now-have-to-underwrite-almost-all-mortgages.png

If you feel like spending some time thinking about Fannie Mae and Freddie Mac, the Congressional Budget Office recently released a good paper on the subject.

By Ezra Klein  | December 29, 2010; 11:30 AM ET
Categories:  Economy  
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Comments

Better yet read "All the Devils are Here" by Joe Nocera and Bethany McLean to get a great overview of Fannie and Freddy. Shilling is correct in the assessment (but then we have blinders on here in DC as most of our property has maintained value; but one wonders what will happen if the shrinkdown of the federal govt does take place).

Posted by: agoldhammer | December 29, 2010 11:59 AM | Report abuse

You can be infantile and call it backpedaling all you want, Ezra, but the GOP was smart to back off the idea of completely privatizing Fannie and Freddie. Winding them down at a more gradual pace is a better idea and will provide the private MBS market time to get back on its feet. I'd rather we not have the securitization market in the first place because it deserves a good deal of the blame for what caused the housing market collapse, but it's there and we have to make due with organizing it better.

Posted by: novalifter | December 29, 2010 1:50 PM | Report abuse

hooray! My property taxes will be going down!!!

Posted by: visionbrkr | December 29, 2010 2:27 PM | Report abuse

He has a chart? I have a mullet.

Posted by: mattintx | December 29, 2010 2:58 PM | Report abuse

What was infantile was the GOP saying they would do it in the first place, without qualification. But then again, that's the kind of tripe that appeals to their imbecilic supporters...

Posted by: JkR- | December 29, 2010 3:09 PM | Report abuse

Let home prices find a bottom. Get rid of the supports.

There is never going to be a "good" time to do it.

Waiting until the market is strong will only change the excuse - "yes, the housing market is strong but taking away the GSEs will hurt it, and look, 6% of GDP is residential investment - you wouldn't want to cause a recession, would you?"

No one has the right to have their debts backed by anyone else, unless that other person consents to it.

Posted by: justin84 | December 29, 2010 3:35 PM | Report abuse

"It's also the grimmest."The bottom line," he says, is that 'house prices probably have another 20% to fall.'"

But Ezra, as an adjunct professor of personal finance, and president of National Personal Finance Education, I ask you, is it really grim, or bad, over the long run, and overall, that housing prices fall?

If real, inflation adjusted, housing prices dropped all the way to one cent for a typical three bedroom house, would this do more bad than good, or would it be an incredible boon to almost all families, who would now be financially far more comfortable and secure – and especially their children?

I had a post on this which was quoted by Mark Thoma, at:

http://economistsview.typepad.com/economistsview/2008/08/wishful-thinkin.html

I hope you'll take a look at it.

Posted by: RichardHSerlin | December 29, 2010 6:23 PM | Report abuse

I realize, of course, we need to stimulate the economy, to increase aggregate demand, but it's far better to do it with government spending on high return investments, like education, infrastructure, alternative energy, basic scientific and medical research, etc., investments of the kind the pure free market will grossly underprovide due to long established in economics market problems, like externalities, inability/impracticality to patent, asymmetric information, etc.

Posted by: RichardHSerlin | December 29, 2010 6:28 PM | Report abuse

I see your chart 9, but looking at that you wouldn't know that Fannie and Freddie were ramping up their loan buys during the time that your graph shows their portion of the market going down, with the exception of 2004.

Can we all agree that 5% down is a really bad idea?

Posted by: staticvars | December 29, 2010 10:33 PM | Report abuse

My question is how can we have a recovery going on, if the housing market is still in free fall??

Guess these experts just do not care about reality!!
Or is "our" government so sure we all are just plain too dumb to understamd?

Posted by: bkarpus | December 30, 2010 6:05 AM | Report abuse

Housing values dropping mean bank balance sheets also should be dropping to reflect the loss of value of their MBSs, CDOs, and other forms of mortgage exposure.

But they won't. Banks are allowed to use Enron accounting for their balance sheet. Just pretend the losses aren't there.

Posted by: Garak | December 30, 2010 8:28 AM | Report abuse

Do the math, no amount of housing depreciation will help homebuyers as much as locking a mortgage into todays low rates. look at the facts, one can finance almost anything with no or little down payment today and this practice has been successful for decades. Existing mortgages, including those with subprime and low down payments, would be mostly performing today if information contained within were factual. There is every reason today to undertake new efforts using housing expansion to create new economic growth using what we've learned in recent failure to help ensure future success.

Posted by: reenie10 | December 30, 2010 9:20 AM | Report abuse

@ richard_serlin - not sure where you teach "personal finance" but I would love to know the prop. tax rates there. It is hardly better for children - or anyone - to have the prop. tax base cratered by 30-40% or more in large areas of the nation, such as Fla. and Az. Teacher payoffs and reduced services, such as library hours, are already the norm in those states.
Property tax forms half or more of the school district budget in most areas. It also supports police, fire, library, health dept. and local courts in most towns and counties.
Children and their parents will face a wasteland of slashed services if the homes in play now are flipped to vultures for 50-cents on the dollar or less. The corresponding prop. tax bills will not support the community services most of us take for granted.
The "affordable" houses will be worth much less than immediately evident if local services, esp. schools, face spending cuts of this unprecedented magnitude. It is in no way a good thing to 'let things settle' back to preboom prices if it tanks the localities' budgets as well as personal wealth.
Loan mods, allowing people to pay prevailing mtg. interest rates, would retain the tax bills and ensure both the local budget and family budgets are on firm ground. The failure of banks to utilize this voluntary program represents a key failure of both Bush and Obama admins. Pols have stood idly by while some 12 mil. estimated foreclosures gut many areas, penalizing families and local budgets while rewarding vulture speculators who swoop into our neighborhoods by the busload.

Posted by: FloridaChick | December 30, 2010 10:19 AM | Report abuse

er, check me:
I meant "teacher layoffs" not "teacher payoffs...."
my bad

Posted by: FloridaChick | December 30, 2010 10:23 AM | Report abuse

FloridaChick/visonbrkr: declines in home value don't necessarily translate into lower real estate taxes; the taxing agency can "simply" raise the millage rate to obtain the same revenue on a lower assessed base. Result is same taxes on a lower assessed value home.

And in FL, there are legions of homeowners still seeing their taxes go up, since under provisions of varous Homestead Acts their taxes could only go up at a rate well below the appreciation; even though the value has dramatically decreased, in some areas because of the cap on increased taxable values the taxable value is still increasing to reach the level of the now-lower assessed value. Crazy I know, but that's how it works.

Posted by: FLTransplant | December 30, 2010 10:50 AM | Report abuse

re: Richard Serling's post -

'"It's also the grimmest."The bottom line," he says, is that 'house prices probably have another 20% to fall.'"

But Ezra, as an adjunct professor of personal finance, and president of National Personal Finance Education, I ask you, is it really grim, or bad, over the long run, and overall, that housing prices fall?

If real, inflation adjusted, housing prices dropped all the way to one cent for a typical three bedroom house, would this do more bad than good, or would it be an incredible boon to almost all families, who would now be financially far more comfortable and secure – and especially their children?'

ARE YOU SERIOUS??? - no rational economist or banker would ever propose that a depreciating housing market of that scale would be good for the economy ... unless you think that a world-wide depression would be preferable to what we have now. A depreciating housing market of that scale would have disasterous concequences putting every mortgage lending institution out of business. A collapse of the modern banking system would follow immediately and the "former" Great Depression would look like the roaring 20's by comparisson (BTW, we may not be able to avoid that scenario regardless, if housing prices drop another 20% and defaults rise precipitously, we may very well face the same grim fate) ...
I'm not sure if you are a very good professor of "personal finance" (maybe that just means that you show people how to ballance a check-book) but your lack of knowledge regarding basic macro-economics leaves this engineer unnimpressed

Posted by: scratchycactus | December 30, 2010 11:35 AM | Report abuse

oh, sorry, that's conSequences

Posted by: scratchycactus | December 30, 2010 11:41 AM | Report abuse

@ FL transplant - I am well aware of the millage and prop tax issues in Fla. They do, indeed, directly impact teacher and other civil servant employment.
Volusia County's 1,100 layoffs last year, even with the stimulus, is but one of dozens of examples of the massive, systemic impact of the lowered tax haul.
This is widely known. You can Bing your county and learn more.
In any event, the "clear them out" meme is idiotic and misinformed, as stated by another poster. The 12-14 mil. foreclosures in five years will upend families, destroy whole neighborhoods and, yes, decimate the prop. tax base. In Fla., with no state income tax, that is money that can't be easily replaced.
Allowing vulture speculators to profit from both sales price *and* lower prop taxes is a grievous side effect of the housing collapse. They join bankers who are ravaging communities via fc and tax lien sales that would do a mafia don proud.

Posted by: FloridaChick | December 30, 2010 12:31 PM | Report abuse

As anyone with an internet connection knows by now, Mr. Klein has been quoted on an interview saying, "The Constitution Has No Binding Power on Anything; Confusing Because it’s Over 100 Years Old..."

With that, this wonderdoofus places his employer firmly in Peking People's Daily land. Why anyone would attach any credibility to anything else he blathers about is beyond me.



Posted by: Curmudgeon10 | December 30, 2010 1:13 PM | Report abuse

FloridaChick said:

Loan mods, allowing people to pay prevailing mtg. interest rates, would retain the tax bills and ensure both the local budget and family budgets are on firm ground. The failure of banks to utilize this voluntary program represents a key failure of both Bush and Obama admins. Pols have stood idly by while some 12 mil. estimated foreclosures gut many areas, penalizing families and local budgets while rewarding vulture speculators who swoop into our neighborhoods by the busload.


Posted by: FloridaChick | December 30, 2010 10:19 AM


This is absolutely right. Someone has to FORCE these banks to step up and do these loan modifications.

Of course, this is what started the Tea Party when the CNBC guy had the rant on TV. The thought somebody who doesn't deserve "help" might get it. It's NOT about that. It's about stabilizing the housing market before everything is in foreclosure. That's for the country's good, not just some "undeserving" slob.

And, we do need to outlaw mortgage based securities. They aren't real and people need to stop becoming billionaires trading them.

Posted by: edismae | December 30, 2010 2:15 PM | Report abuse

i sure don't want my property value to take another hit. there goes the equity.

Posted by: TheBabeNemo | December 30, 2010 2:27 PM | Report abuse

... I have a chart which says that house prices will rise 50% each year for the next 50 years ... people will be making minimum wage while China, India will take away all the better paying jobs. The only money will be made "flipping" homes and everyone will be rich.

.. Oh come on ... stop choking a 20% decline is not that bad and considering that wages have not gone anywhere but down -- give the next generation a break ... they are poorer than the current generation!

Posted by: free_np | December 30, 2010 3:18 PM | Report abuse

only a leftist rag like the Post would put left wing oped journolist writers like Klein and Pearlstein on the "business" page. No wonder most Post readers are economically ingorant.

Posted by: silencedogoodreturns | December 30, 2010 4:25 PM | Report abuse

To the commenters:

Any negative of housing prices plunging can be counteracted in a far better way than by propping them back up.

– A drop in property tax revenues? Increase income taxes progressively, especially on the very wealthy, by an equal amount, and hopefully at the federal level, with the money intelligently and equitably kicked back to the states.

– More bank defaults? Big change in the process of reorganization to make it far faster and better, so the government can very quickly take over the failing bank and keep it lending while it's reorganized and its debts are written off. And far more and better bank regulation to stop these situations to start with. – Some of this was, in fact, put in the recent banking reform bill that passed.

– A drop in aggregate demand from homes no longer being ATMs? Replace the spending on big screen TVs and granite countertops with high return investment in education, infrastructure, alternative energy, basic science and medicine, etc. (despite Ezra's recent post on this, much of this can be done over two or three years, especially with greatly increased grants to the states to give them the manpower to speed the approvals and planning. Plus, knowing this stuff is coming on line in the next few years increases consumption and private investment now in anticipation).

Posted by: RichardHSerlin | December 30, 2010 4:27 PM | Report abuse

I'll add too, aside from some investors, the only people who really benefit from high housing prices are people who will be moving from a larger, or relatively more valuable home, to a smaller, or relatively less valuable home.

If you're staying put you don't benefit. You don't see that money. You could take it out as a home equity loan, but if you intend on paying back that loan – with interest – you aren't helped. In fact, higher home values mean higher property insurance rates.

And if you're moving to a different house of the same size, or value, then there's no gain if prices go up. It's one expensive house to an equally expensive house. The only ones who gain are people moving from a larger home to a smaller one. If you're doing the reverse, say moving from a small house or condo to a bigger one to start a family, then you're severely hurt by high housing prices. And you're children and grandchildren are really hurt by the burden of crushing housing payments – look at young people in Japan who have to take out 100 year mortgages.

Increasing and high housing prices are a very large and iniquitous transfer of wealth and income. They tend to increase consumption and decrease good high return (high total societal util return) investment. They increase income inequality and do far more harm than good over the long run.

Posted by: RichardHSerlin | December 30, 2010 5:11 PM | Report abuse

Before you let a Gary Shilling analysis persuade you, nip over to Amazon and take a look at the books he's written over the years. I realize my point is ad hominem. Just because he has a bad track record doesn't mean he's always wrong and it certainly doesn't mean he's wrong this time. But predicting the future price of anything is extraordinarily difficult, so I don't take anyone seriously unless he or she has an excellent track record extending over more than one business cycle.

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