Analyzing The U.S. Housing Slump
ROBERT SIEGEL, Host:
To find out what's up with housing or why it's so down, we've called upon Yale economist Robert Shiller, co-developer of the S&P/Case-Shiller Home Prices Index. And Professor Shiller, welcome once again.
ROBERT SHILLER: Hi, nice to be here.
SIEGEL: And the most benign explanation for the February drop that I've seen is that a lot of the country was snowed in in parts of February as you could barely see the homes, no less buy them. What impact would you say the weather had?
SHILLER: Well, I've heard that, too, and I think it's plausible, part of the story. But, you know, we've been declining for some months now on home sales. Another plausible story is that home sales were exaggerated by the homebuyer tax credit. When it was first supposed to expire at the end of November, they extended it. But, you know, a lot of people got their shopping done by November. So there was a surge, and now we're returning to the same glum levels.
SIEGEL: A sort of a cash-for-clunkers effect but with houses nonetheless.
SIEGEL: Have home prices now come down to levels that you would say are consistent with pre-bubble historic trends? Are these really post-bubble prices or is there still some froth in there?
SHILLER: Well, we're down. According to the 10-city index that - the S&P/Case showed a 10-city index - we're down over 30 percent. And so it's quite a sharp drop. If you look nationally, though, it's not down that much. I think that we've come a long way down now, and it's not like the home prices are inflated anymore. In some cities, home prices are down over 50 percent, like Phoenix or Las Vegas. We've seen a really sharp correction.
SIEGEL: What role in all of this does the so-called shadow inventory play, the many homes in foreclosure, or perhaps soon in foreclosure, that may be on the market or that banks may still want to hold off the market until the market improves a little bit more?
SHILLER: But there's also, I think, a gradual decline in our sense that we really ought to pay back our mortgage. And there's more and more talk about, you know, it's like an option, you can just abandon it. And if your home is worth less than the mortgage - and now it's estimated. Economy.com estimates there are 16 million homes worth less than their mortgage. That's huge. And however many of those people decide to drop out, it's going to be a real drug on the market.
SIEGEL: You mean, if people regard walking away from a mortgage as being a reasonable option, what had been, say, the kernel of rock-solid truth in all those mortgage-backed securities, that Americans want to pay off that mortgage, want to make the mortgage payment first, if that's no longer true, that has a huge impact on lots of things in the economy.
SHILLER: Well, a recent survey showed the great majority of people feel morally bound to pay on their mortgages. But I think that moral certitude is being shaken by the impression of a lot of shenanigans by Wall Street people who are actually on the other side of those mortgage contracts. So you're saying if those guys would certainly default if they had the right to, why don't I? That's the feeling that is developing at this point.
SIEGEL: Well, Professor Shiller, thank you very much for talking with us about it today.
SHILLER: Okay. My pleasure.
SIEGEL: That's Professor Robert Shiller, economist at Yale University and co- developer of the S&P/Case-Shiller Home Prices Index.
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