Where Is the Housing Market Headed? After five years of explosive growth, the housing market is finally cooling off. New national data show that the stock of unsold houses is up, prices are stable or dropping in most places, and sales this quarter are down from a year ago.
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Where Is the Housing Market Headed?

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Where Is the Housing Market Headed?

Where Is the Housing Market Headed?

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This is TALK OF THE NATION. I'm Neal Conan in Washington.

After five years of explosive growth, the housing market is finally cooling off. New national data show that the stock of unsold houses is up, prices are stable or dropping in most places, and sales this quarter are down from a year ago. And gone, at least for now, are the frenzy bidding wars in waived inspections of just a year ago, and the widespread assumption that your house would appreciate by 10 percent or more every year.

But it's not the same everywhere. While sales plummeted in formally red hot markets like, Florida, California and Virginia, sales are up in 20 states including, Texas, North Carolina and Vermont. Still, the trend is definitely down, nationwide. We'll talk about the affect on the economy as a whole and what it means for suddenly lonely sellers; for buyers and for renters; for people who took advantage of low interest rates to buy a first home; and for those who bought second or third homes in hope of quick re-sales and good profits.

How's the housing market where you live? If you have questions about buying or selling in a buyers market, our number here in Washington is 800-989-8255. That's 800-989-TALK. E-mail or send us your most outrageous story from those golden days of the housing boom. How many offers did you get on the first day? The address is talk@npr.org.

Later on in the program, graphic non-fiction, the report of the 9/11 Commission comes out as a comic book. But first, the end of the boom.

Lawrence Yun is a senior economist with the National Association of Realtors and he joins us here in Studio 3A.

Thanks for coming in for the program today.

Mr. LAWRENCE YUN (Senior Economist, National Association of Realtors): Good afternoon.

CONAN: Besides all of the for sale signs we can all see out there, what indicators tell you that the boom is finally over?

Mr. YUN: Well, the home sales activity peaked last August, and since that time sales have steadily trended downwards. But it's not only the sales but things like housing starts, mortgage purchase applications, the days on the market has been lengthening. So there are many indicator, basically saying that the boom is over, and now we are in a cooling trend.

CONAN: And, I guess the next question is, a lot of people thought, well this was a big bubble and when it bursts it's going to burst fast. Are we in for what they're calling a hard landing or a softer landing?

Mr. YUN: Well, all real estate is local. So some markets are seeing a rather sharp transition. For example, in Florida markets, where again it was very frenzied level of activity just last year, this year the inventory has doubled, tripled the level of last year. Buyers have suddenly disappeared. So there is a price - pressure on the prices to actually come down. But in other parts of the country, for example, say Austin, Texas or in Seattle, Washington, there is actually lack of inventory. Home prices are actually accelerating. So real estate is local, but overall, for the country as a whole, we are seeing maybe 70 percent of the country on a decline…

CONAN: Mm-hmm.

Mr. YUN: …30 percent on the rise.

CONAN: Is it fair assumption to say that the hotter your local market was maybe two, three years - even one year ago - the more likely it is to be plummeting now?

Mr. YUN: The overheated markets are the ones that are seeing the sudden transitions.

CONAN: Mm-hmm. Now are all kinds of homes affected? Again this is all local, isn't it?

Mr. YUN: It's local. One area that is taking a more plunge than other market is in the condo market. The - lot of investor demand of last year, now the investors are suddenly leaving. And typically, investors are more interested in low-maintenance properties. So they typically buy condo properties. Now the investors seeing a less opportunity for price appreciation, are leaving very fast, which I think is very healthy. I mean, we are cleansing out this non, you know, long-term buyers. So I think that's good for the market over the long-term. But over the short-term, there is a little pain as they are suddenly leaving.

CONAN: And if people are wanting to actually sell their condominium for a real reason they could have a problem.

Mr. YUN: That's right. So people who are not in the need to sell, if they sort of wait it out, I think the market will turn for the better. But in the short-term, at least over the next year, I think the market will be difficult.

CONAN: Now, in terms of people who are selling for one reason or another, again, you were talking about there were record heights last year. People who are selling this year, for the most part are they getting less than they'd hoped or are they taking a loss?

Mr. YUN: For most people, I mean, they're still gaining gains. I mean, so compared to last year, you know, they are still getting four, five percent higher price now compared to this time last year. But again, locally speaking -for example, in the D.C. market or Florida markets, or the, some of the California markets - now they are actually getting lower price now than what it was last year.

CONAN: But that - if you've held on to your house for 10 years or five years, you're still going to have seen a lot of appreciation there?

Mr. YUN: A person who bought a home five years ago - a typical U.S. homebuyer who bought a home five years ago - would have accumulated $60,000 in housing equity gain. So over the long-term, there is a gain. Even if there was to be a short-term fall, you know, a person who bought five, six years ago - they would still have very substantial equity gains.

CONAN: Now, what does this do to the national economy? Housing has been an enormous part - not only the construction of new houses but also all the financing that goes on and the re-financing - as people saw very attractive interest rates.

Mr. YUN: Housing directly contributes about 15 percent of the national economic activity, 15 percent of GDP, directly. Indirectly, basically through the housing equity accumulation taking - people are taking out cash re-fis and go out and buying automobiles, television, and such - that has been a very big boost in holding up consumer spending. I mean, many economists have been puzzled as to why consumer spending has held on so well over the past - the recession cycle, sluggish job growth - and the reason is due to the strong housing market.

And now the housing market is cooling. I mean, that is certainly raising concern. And this is something, I think, particularly the Federal Reserve needs to carefully monitor, because if the - should the housing market, home prices suddenly flatten out, or even turn negative - that would imply consumer spending pull-back, and then may actually tip the economy into a recession.

CONAN: Mm-hmm. And so at that point, interest rates - well, interest rates are always of enormous, you know, excuse the expression, interest - but interest rates in this particular regard, they've been trending up the last year or so. And now that's going to have to be carefully looked at.

Mr. YUN: Certainly. You know, there was a pause in last Federal Reserve meeting. And my guess is that, you know, Federal Reserve need to monitor the housing market very carefully. You know, there are some signs where some markets are very fragile and any repercussion in the consumer spending area could have really a severe, negative economic consequences.

CONAN: Well, let's get some listeners questions on the air as well. 800-989-8255, if you'd like to join us. 800-989-TALK, e-mail us talk@npr.org. Don't forget to sell us, send us your most outrageous story of the sellers' market.

Here, joining us now on the line from Jewett City, in Connecticut, is Pricilla.

PRICILLA (Caller): Yes. Hello.


PRICILLA: My husband is in the building trades, and right now what seems to be happening in Connecticut is they're really focusing on affordable housing, because people tend to be leaving Connecticut because of the lack of affordable housing. I'm wondering if that trend is going to continue, or if they see that as something that is going to be bottoming out also. Because right now, we've got a lot of people coming into Connecticut but there's not a lot of affordable housing.

CONAN: Mm hmm. And just looking at the - quickly - at the statistics I have available - sales of homes in Connecticut was down three and one-half percent over the past year. So, Mr. Yun?

Mr. YUN: Certainly the affordability issue has become a major problem in the past five years due to the significant (unintelligible) of home prices. So if you are a homeowner you gain the housing equity. But if the person was a renter and trying to enter the market now, you know, it's very difficult with higher home prices and higher mortgage rates. So, many people have been moving into the rental market and the rents have been strengthening.

For some…

CONAN: By strengthening, rents are getting higher, is what you're saying.

Mr. YUN: Rents are getting higher. And some builders are recognizing that there is a strong housing demand on the lower end side and, you know, expanding into the affordable housing, and I think that's a great trend. Certainly in a high-priced market, you know, we are hearing stories of public-service workers -policeman, fireman - who have to live further out, that cannot afford to live in their locality. So any development in the affordable housing area is the right trend.

CONAN: Mm hmm. And is that the kind of housing your husband builds, Priscilla?

PRISCILLA: Yes, but I'm wondering what would be considered the median for Connecticut. Is there a median that you can give me an idea about what would be the cost of a median price of a house? I know, right now, my house was $100,000 ten years ago and it's up to 315.

Mr. YUN: You know, each local market, because of the variation in the land prices - I mean, the structure could be the same but due to the variation in the land prices - a different area would consider something affordable while the same home will be considered expensive in other parts. Connecticut is more a pricey market. I think any development of homes under $200,000 will be, I think, very good for many current renters who are looking into entering the homeownership market.


CONAN: Good luck, Priscilla.

PRISCILLA: Thank you very, very much.

CONAN: Sure.

PRISCILLA: Yep. Bye-bye.

CONAN: Bye-bye. And let's go to Bill. Bill's calling us from Grand Junction, in Colorado.

BILL (Caller): Hi there. I was debating between renting and buying and I live in Colorado. And I was wondering what your thoughts were on the real-estate market, in general, in Colorado.

CONAN: I'm just looking at this list and sales were down 2.3 percent last year. But go ahead, Mr. Yun.

Mr. YUN: Colorado, Utah, New Mexico, the Rocky Mountain region - I'm actually optimistic about that region. What we are seeing is that many people who have lived in California suddenly realize it's very difficult to live there, or people who have been owners in California are saying: hey, why not move to, say, Colorado, cash out, use the equity to buy a much larger house at a smaller price, and use the remaining cash for just enjoyable lifestyle. So, we are seeing a migration trend of people moving from California into Utah, Colorado… And I am more optimistic in, say, Rocky Mountain state, compared to the more coastal market.

BILL: Thank you so very much.

CONAN: Good luck, Bill. And very broadly speaking, as an economist like yourself, look at the demographics of the country - the number of immigrants coming in, the number of households that are expected to be created over the next 10 or 20 years - he market for housing looks pretty sunny.

Mr. YUN: The immigrant demand has been very strong. You know, typically it takes several years for immigrants to sort of save for down payment. And the fact that we have had such a surge in immigrant population in the 1990s, and in the early part of this decade, they will pay strong dividend for the housing market going forward. And also, you know, U.S. is in the unique position where the population growth is very respectable, unlike European countries where there's population as stagnating or declining. So anytime a population is growing that just means that people need someplace to live, so we need to build more homes.

CONAN: Lawrence Yun, thanks very much for your time. We appreciate it. Lawrence Yun, a senior economist with the National Association of Realtors. He was with us here in Studio 3A. When we come back, more of your calls. How's the housing market going where you live? I'm Neal Conan. You're listening to TALK OF THE NATION from NPR News.

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CONAN: This is TALK OF THE NATION. I'm Neal Conan in Washington. The housing boom is over, at least that's what the numbers tell us. Sales are down in more cities than they're up. Prices have leveled off in many other areas. We're talking about what the latest figures mean if you're looking to buy or sell or just testing the market. And in a few minutes, how a housing slowdown might affect the rest of the economy.

Joining us now is Elizabeth Razzi. She's the author of The Fearless Home Buyer: Razzi's Rules for Staying in Control of the Deal, and the author of the forthcoming book, The Fearless Home Seller. She's with us here in Studio 3A. It sounds like you've anticipated this change.

Ms. ELIZABETH RAZZI (Author, The Fearless Home Buyer: Razzi's Rules for Staying in Control of the Deal): Very often we're doing both buying and selling the same transaction so it's the whole deal.

CONAN: Mm hmm. Yet, has the market changed in your experience? Is it now a seller's market?

Ms. RAZZI: Oh, absolutely. I mean - and it was changing even as I was writing the books. The markets of the last couple of years - you know, the extreme sellers' markets - were really just incredible, and it's not supposed to work like that. You're really not supposed to be able to sell a house in 24 hours. We kind of got used to it and there's some people who really have known nothing else. But it should take several weeks to several months to sell a home. You should be able to negotiate. You should be able to have a little selection.

CONAN: Really? This is a brand-new world for a lot of people…

Ms. RAZZI: Exactly. It's back to normal.

CONAN: Back to normal. Well, it's going to be a little disappointing for people who wonder why they're getting no action on a house that's priced just the same as their neighbor got last year.

Ms. RAZZI: I think that's the key - it's priced just the same as their neighbor got last year - because the market has changed and now they have to compete with other sellers. That didn't use to be the case. You didn't really have any competition.

CONAN: Is there sort of a point of disbelief, where sellers say, wait a minute, this can't possibly be; I'm just going to hold the price here for a while and see what happens?

Ms. RAZZI: Well, yeah, and we have to also realize that we tend to view our own home the way we view our own children, which is a little bit above normal - above average. You know, our house is a place where we've lived and we've invested our own tastes in the place. And so, the idea that people wouldn't just want to go and snap it up immediately at this reasonable price is just a little bit offensive.

CONAN: There's also the idea that, frenzy or not, the way most people buy houses is not to see an instant profit in six months or even two years time - but they buy to live in for five to ten years.

Ms. RAZZI: Housing is the ultimate long-term investment. Real estate in general is a long-term investment and a lot of people forgot that. The whole idea of flipping real estate is just crazy.

And I know a lot of people are being burned because they did invest in options to buy condos and things like that and turn quite nice profits within a year, and that's not typical. You know, typically you should be in a home three years at least - to have enough appreciation to cover the costs of hiring a broker to sell it, for one thing - and then to pocket a little bit of money.

CONAN: And don't forget those moving costs. They're going to add up, too.

Ms. RAZZI: Absolutely.

CONAN: Let's get some listeners in on the conversation. This is Sandy(ph). Sandy is calling us from Saint Louis.

SANDY (Caller): Hi.


SANDY: I put my house on craigslist-Saint Louis on August the fifth and I'm signing the contract on it tonight.

Ms. RAZZI: Good for you.

CONAN: Congratulations, Sandy.

SANDY: I am so happy, I'm levitating.

CONAN: And did you get the price that you had hoped to get?

SANDY: I got about $7,000.00 more.


SANDY: I took bids on the house on Sunday the 20th and there were three valid bids, and this bid was considerably above the next highest bid.

CONAN: Hmm. So at least in Saint Louis, Missouri, Elizabeth Razzi, it looks like the old rules are still in effect.

SANDY: I can't guarantee that because there's an awful lot of houses for sale.

CONAN: Ah-ha.

SANDY: And they're sitting there.

CONAN: Why did yours move do you think?

SANDY: Oh, I think - I wrote about my house and I live in a four-family building that was built by an architect in the 20s, and I guess I romanced it. I put a headline on it that said: Small castle with income.

CONAN: (Soundbite of laughter). So…

SANDY: A wonderful young prince has bought it.

CONAN: Salesmanship always matters, Elizabeth.

SANDY: Well, sell the sizzle, I guess, but it's still a wonderful house. It's well worth it.

Ms. RAZZI: Well, it always helps to have a desirable property and to have something that can be set apart from the big flock of homes that are competing with yours on the market. Yours had two things going for it, it had the architectural distinction and the income property. And they're two great things that you were able to promote in your advertising and that's a smart thing to do.

SANDY: Thank you. I'm so happy these people are going to have it.

CONAN: And have you found a new place to live, Sandy?

SANDY: Yes, I have. I'm moving into an area where a lot of people are restoring houses. It's called Benton Park. It's right near the Anheuser-Busch Brewery - not a commercial - and a lot of good people are moving there, and I'm going to, too.

CONAN: Sandy, good luck to you.

SANDY: Thank you so much.

CONAN: Bye-bye. Let's see if we can get another caller on the line. And this is Joseph(ph). Joseph calling us from New Orleans.

JOSEPH (Caller): Yeah, good afternoon.

CONAN: Afternoon.

JOSEPH: I'm just calling to try to - maybe you can give me some guidance. I don't know about what's going to happen with the market. We all kind of need to, you know - need to know if we should stay with our houses or sell our houses. My house was about 50 percent destroyed - completely gutted - and it's a shell of a house now, and I'm living in a FEMA trailer in the front yard and I'm trying to decide - should I sell or should I hold onto it until, like, next season. You know, it's a very confusing time for a lot of us down here.

CONAN: Elizabeth, any advice?

Ms. RAZZI: Well, unfortunately, you're in such an unusual situation. So much of your decision-making depends on what other people are going to do - whether they're going to rebuild the floodwalls and the levees to the levels that will protect your home or not, what's going to happen to the whole area around you. You really need to look at the overall city planning, and what FEMA and the corps. of engineers and everybody's going to do, to decide if that old property of yours is going to be as valuable to you as it was before the storm.

JOSEPH: Right. (Unintelligible)…

Ms. RAZZI: Not an easy decision.

JOSEPH: Yeah. There's a lot of factors involved. Fortunately, I live in a neighborhood that is pretty much coming back. It wasn't completely destroyed. The first two blocks of our neighborhood were destroyed, and then the other ones - they were fine. So, I think in the future we have a good place to be.

CONAN: Well, it sounds as if you have a strong - at least a rationale - for your emotional attachment.

JOSEPH: Well yeah, that's true, too. You know, it's like - you have to want to be there, for sure.

CONAN: Yeah, absolutely.


CONAN: Good luck.

JOSEPH: Thank you very much.

CONAN: So long. Buying or selling a house can often be an emotional transaction as well as a financial one. Those emotions can wield considerable power. Robert Shiller is an economics professor at Yale University and the author of Irrational Exuberance, second edition. He joins us now from a Yale University studio in New Haven, Connecticut. Nice to have you back on the program.

Mr. ROBERT SHILLER (Author, Irrational Exuberance): Hi.

CONAN: Do you feel justified in your predictions of some years ago? The irrational exuberance finally over, do you think?

Mr. SHILLER: Well, in the stock market, but we're talking about the housing market.

CONAN: Yes, indeed, but you were writing about that as well.

Mr. SHILLER: That's what I added in the second edition, because I thought that we were going through a boom in the housing market that looked an awful lot like the boom that we saw in the 90s in the stock market - driven by human psychology. And your two speakers, so far, really haven't mentioned that. I'm concerned about this market because I think it's supported by feelings that the market will continue to go up. And once that stops happening there's going to be people who want to sell.

CONAN: Yet, thus far - and a lot of people talked about this - thus far people are predicting, by and large, a soft landing. Yes, prices are stable - or going down in some places - but they're not expecting a real drop in prices.

Mr. SHILLER: Well, it's possible they're right. I suppose we can hope that they're right. But we've seen big drops. This is the biggest real estate boom in U.S. history and I don't see how anyone can be confident. The futures market for a single-family homes - which just opened in Chicago - is now predicting declines of between four and five percent, for ten major U.S. cities, by May of this year.

Now, I don't know. Maybe not quite so soon, but there's a lot of people worrying about declines and those worries could have the effect of getting people to sell and producing those declines.

CONAN: Mm hmm. And the psychological effect - I guess it's the same as the boom except in reverse.

Mr. SHILLER: We can go down on a negative path. As prices start falling, more and more people hear about that, and they think - why am I holding two homes, you know? Or why am I holding a home at all? I could live in an apartment. And it doesn't take a whole lot of those people to throw the market out of bounds and start producing more declines.

CONAN: So what statistics - what numbers - do you look at as indicators?

Mr. SHILLER: Well first of all, it's the futures market, because that is the market that is a forecasting market. And we've learned that such markets have predicting power. Beyond that, there's a lot of, you know, we've seen a lot of signs that a peak may be at hand. And Lawrence Yun mentioned some of those, without the same interpretation that I would give. I mean, he was generally not painting this as a dramatic scenario. But we've seen a sharp drop in how housing starts and in permits in the last few months. And these are leading indicators.

Housing permits is one of the ten leading indicators in the index of leading indicators because it has, in the past, had consequences. When people stop buying or building houses, that's something to start worrying about. But I don't know for sure, I would say. It could just resume going up. But at this point, it looks like this could be a major turning point.

CONAN: In the articles that I've read, people say, you know, a precipitous collapse of housing prices is often connected to losses in the job market at the same time housing is going down. That does not seem to be happening.

Mr. SHILLER: Well, but I don't think that this drop in home prices is likely right away. I mean, I'm thinking that a plausible scenario would be a recession in 2008 accompanied by serious drops in home prices. It's a plausible - you know, it has maybe a probability of less than a half, but it's the kind of thing that's happened many times in history.

And why do we have recessions? Well, these are difficult things to disentangle, but the real estate market is part of the process that brings on a recession. So it's not as if it has to be coming from somewhere else, it comes from the real estate market.

CONAN: Elizabeth Razzi, what do you people tell you when you talk to them?

Ms. RAZZI: Well, the thing is I think we need to constantly keep in mind that the housing market does operate differently than the stock market, the bond market, and commodities markets; in that people are not going to decide - oh housing prices are about to go down, I better sell my house, my homestead, and go move into an apartment somewhere just because of finances.

I don't think that kind of apocalypse is coming. And also people have lifestyle needs and decisions. You know, if two - if a young couple has a baby on the way and plans for a larger family, they're not thinking of a two-bedroom apartment, they're thinking about a home, a house somewhere. And if they're planning to be there five years, ten years, which is not unreasonable, that's a fairly safe decision to make.

Even regardless of what's happening with futures, commodities, and interest rates, that's a lifestyle decision and it's usually a pretty sound one.

CONAN: And, Robert Shiller, it's a fairly large segment of the housing market.

Mr. SHILLER: Well, you know, we've seen drops in prices before. And so something happened in the early 90s that brought - Los Angeles lost 40 percent of its real value between 1990 and 1997.

Ms. RAZZI: Right, but then it went on to gain that value back, plus more, for people who held on longer.

Mr. SHILLER: It did this time. Yeah, but you know, that doesn't mean it's going to happen next time. We saw some major… You know, there was a huge real estate boom in California in the 1880s and then it dropped. It didn't come back until the 1970s - there was a huge increase. So…

Ms. RAZZI: Well, there was giant earthquakes that had something to do with that as well. But the thing is…

Mr. SHILLER: No, not for another 20…

Ms. RAZZI: Individuals still had to make a decision on where to buy.

CONAN: We're discussing the drop and stabilization of housing prices in many parts of the country. If you'd like to join the conversation, our number is 800-989-8255. Our e-mail address is talk@npr.org.

And this is TALK OF THE NATION from NPR News.

And let's get another caller on the line. And this is Bill. Bill's with us from San Jose.

BILL (Caller): Yeah, hi.


BILL (Caller): I'd like to hear your guests talk more about the economics that we're underpinning this huge run-up in prices and that I think now we're reversing and could cause the same thing to deflate this bubble. So, what I'm thinking are the main underpinning economic factors here, were the historic change in interest rates that the Federal Reserve made - lowering interest rates to historic lows in a very fast pace - and that created a huge lever on housing prices, allowing people to borrow more money for the salary.

And the other thing - and I live in Silicon Valley - what's been driving prices here, are these really exotic loan types - option-ARMS interest-only loans -that, again, have been a huge lever. And I understand - I know that the interest rates have gone up. Maybe they'll go up more, maybe they won't. But they've already gone up a lot vis-à-vis where they were before. And now I'm hear that the regulating authorities are going to be cramping down on these exotic loans because people are really misusing them.

I'd like to hear the guests talk more about this and what that could do. In my mind, it seems like prices could go back to where they were three or four years ago, which wouldn't be a 10 or 20 percent decline, it would be a 70 or 80 percent decline in prices. And that's really amazing.

CONAN: Robert Shiller, what do you think?

Mr. SHILLER: Well, Bill is absolutely right to bring up this issue, and it's something I've been bringing up. I've been trying to talk to the regulators. They haven't been moving fast on the - there's nothing wrong with ARMS or option ARMS for the right people. But he problem is that some people have been using them in a wishful thinking to buy a house that's bigger than they can afford.

It's the short rates that went down to one percent, when the Fed was really cutting rates, that made the ARM seem like such a way to buy a really big house for some people, especially less-educated people who bought them. It's a real problem.

CONAN: I should just say an ARM is an adjustable rate mortgage. And, Elizabeth Razzi, that's just one of the exotic financing options that were made available.

Ms. RAZZI: Well, an adjustable rate mortgage in itself is not all that exotic. They've been around quite a long time. One-year adjustable or a hybrid loan that's fixed for five, seven, ten years and then switches to a one-year adjustable is a fairly reasonable thing to do.

Unfortunately, over the last couple of years, a lot of mortgage lenders and mortgage brokers were pushing these payment option mortgages where you could not pay enough to pay off the loan every month, or you could skip payments, or you could make only interest payments.

And it was very much like buying your house on a credit card. And you would get into the same kind of debt trouble as buying a house on a credit card. I think they were absolutely irresponsible in making those loans. And I know some very well educated, savvy people, who did not understand the degree to which their payments could go up.

CONAN: And, Robert Shiller, do you think that all of this could snowball into the kind of price declines that Bill was talking about?

Mr. SHILLER: I think it's an important factor, although the most important factor is just the psychology. We don't, you know, even if there were no option ARMS, we could still have a bust just as we'd have in the past. It just depends on psychology.

CONAN: Don't busts, though, looking back at psychological - doesn't something sort of trigger them and they happen very suddenly.

Mr. SHILLER: Not in real estate. Well, even in the stock market, nobody really - the triggers are so hard to see. What caused the crash of '29? People still don't know. What happened in October of 1987? It seems to be, I think, psychology is the unseen factor. And unfortunate for economics, it's not easy to describe. But you sense that the psychology is changing now. I'm not sure about it, but I mean it confirms why I see markets predicting price declines coming up.

CONAN: And yet prices could be more or less stable, you're suggesting, even if - as the psychology does change for two or three years.

Mr. SHILLER: Yeah. I'm not at all sure what prices will do. What… Interesting case is Australia, cause it seemed to be leading. I thought Australia would be a case study for our own housing bust. But now, according to the latest news from Australia, it looks like their market is firming again. So, you know, you just can't predict.

CONAN: Bill, thanks very much for the call. And we'll be back after a short break. If you'd like to join our conversation on the meaning for the economy and for buyers and sellers of the stabilization, or drop in many places, of housing prices, give us a call, 800-989-8255. E-mail is talk@npr.org. Plus 9/11 depicting in the pages of a new comic book.

It's the TALK OF THE NATION from NPR News.

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CONAN: This is TALK OF THE NATION. I'm Neal Conan in Washington, and here are the headlines from some of the stories we're following here today at NPR News.

Iran's chief nuclear negotiator says Tehran is ready for what he calls serious talks over its nuclear program. It's unclear if the government is willing to suspend uranium enrichment, which is a key demand of Western governments. Iran could face U.N. sanctions if it does not suspend its nuclear program by the end of this month.

And in Baghdad, prosecutors heard gruesome witness testimony in the second trial of former Iraqi President Saddam Hussein. Survivors of the chemical weapons attack in 1987 recalled a greenish smoke that sickened them. The testimony caused one of the court recorders to burst into tears. Saddam Hussein says the survivor's testimony was coached.

You can hear details one those stories of those stories and, of course, much more later today on ALL THINGS CONSIDERED.

Tomorrow on TALK OF THE NATION, it's been more than a week since the cease-fire took hold in Lebanon. We'll talk about the political fallout from the fighting and the peace, both in Lebanon and in Israel. Plus, with midterm elections nearing and plenty to talk about this week, an expanded visit with our political junkie. That's tomorrow TALK OF THE NATION.

In a few minutes, why you can now read the 9/11 Report as a graphic, well, non-fiction. Right now we're talking about the end of the housing boom. Our guests are Elizabeth Razzi, the author of The Fearless Homebuyer: Razzi's Rules for Staying in Control of the Deal, and Robert Shiller, a professor of economics at Yale, and author of the book, Irrational Exuberance.

And let's see if we can get another caller on the line. And this is Sam. Sam's calling us from the Bay Area in California. Sam, are you there?

SAM (Caller): Yes I am.

CONAN: You're on the air. Go ahead please.

SAM: Yes. I'm a real estate broker in the Bay Area, and I want to say to Doctor Shiller, I wish I'd listen to you in 1999. I remember the same conversation vis-à-vis the stock market. And I was over-involved with three jobs and didn't pull out of the market. You were dead on.

I refer to the book, Devil Take the Hindmost, which tracks these kinds of trends. You probably are familiar with it. And there's something to be learned there. I think we are at the peak of the markets here in the Bay Area. We've seen four or five percent drops in prices on very good homes - that are very good homes, are in great shape - can't be anything other than the topping of the bubble. That's all I really have to say on this. And, again, Doctor Shiller, I appreciate your help.

CONAN: And, Sam, does Doctor Shiller's description - not his alone, but other people have called it too, a bubble, in other words, something that's unsupportable once the psychology changes it - you would describe the real estate market in San Francisco that way?

SAM: I think that's reasonable. But one other thing I want to address also, is the fact that the lending side has really gotten out of control. Same thing happened in the 80s, people were making crazy loans. Lenders will make loans if they can make the points, and that's what they're doing. I would say that the Fed has been irresponsible in keeping interest rates down for way too long, even though that's benefited me personally. I think that's a great reason for the sprint in housing prices.

And if you look at the past, that's what happened with the stock markets and other bubbles that have occurred in the last 200 years. It's classic. So, you know, just a simple observation.

CONAN: Robert Shiller, nice to hear some kind words.

Mr. SHILLER: Yeah. The Bay Area is one of the most glamorous areas in this country, and glamour areas are vulnerable to booms or bubbles. They're close to Silicon Valley, which has achieved huge home prices. Now Lawrence Yun was just saying that a lot of people are moving to the Colorado or neighboring states because it's so expensive out there in California.

And so I think that's part of the process. Even though these places are so highly-priced, we shouldn't trust those prices for the long run because people can move away and new construction can come in to find alternative places for people to live, and that will bring prices down.

CONAN: Elizabeth Razzi?

Ms. RAZZI: Well, that's why you can have a little more comfort in buying a home in a place that hasn't had that kind of huge run-up. I mean, the Bay Area is about the - the poster-child for the real-estate bubble. It just got so expensive that it wasn't worth what it takes to live there - you can get a good job somewhere else in the country - and that's sort of a self-limiting thing.

But there are lots of places in the country where you can move and find affordable housing and where you can take the risk and make a bet on investing your money in a home for several years. You know, it's riskier - the metro areas where, you know, people have been speculating on houses, and condos especially, the resort areas, they're the riskier ones - where people were taking out those really risky mortgage loans to stretch beyond their capability to get into homes. That's where the problem is.

CONAN: Sam, thanks for the call. Good luck.

SAM: Okay, thank you.

CONAN: Bye-bye. And let's see if we can get one last call in. Christina(ph). Christina's with us from Sacramento.

CHRISTINA (Caller): Yes, hello.


CHRISTINA: Thank you so much today. I'd like to say first of all that all the points that have been covered so far are valid from my experiences. I'm a realtor in Sacramento. And I would like to talk about the psychology of fear and what's going on in relation to my unique experiences with the Spanish-speaking immigrant community.

First of all, it's really important to remember, when I'm speaking here, that there's a huge percentage of Spanish-speaking immigrants that are a part of the U.S. consumer economy. And previously they were able - because it is not the law, it's a lender preference as what the qualifications are - it was easier for them to qualify for a loan showing their documentation, whatever they had.

But in California, what happened was, when the Driver's License Bill was repealed and did not allow the undocumented immigrants to re-apply for their driver's licenses or identification cards - what happens is literally hundreds if not thousands daily in California have their current driver's licenses expired. Okay? So the implications, the economic implications of that, not to mention the personal ones, are huge when it comes to people that have been employed as jobs as drivers, and their employers are also scared because they might have to document them, or they can't get insurance for their drivers because they don't have a driver's license.

So what happens is that the instability and the fear of this has stopped, not only the Spanish-speaking community from wanting to apply for a loan because they're afraid of what happens to their job status, but also the lenders have gotten a lot more careful about that. And at the time of closing, when you're signing your escrow documents, you have to have a current, valid form of identification. It doesn't matter what country you're from, it has to be valid.

CONAN: And these…

CHRISTINA: A lot of these people have been here for like 10, 15, 20 years. They have their identification. They're not current in their former country because they've been here and been able to use this identification, and now it's not valid.

CONAN: Yeah, I think we get the point, Christina, and Robert Schiller, I'd like to ask you to respond to that. Obviously, these kinds of restrictions seem to be on the increase across the country.

Mr. SHILLER: Yes, see, the kind of thing - she brings up what lenders might do. If the market starts to turn, lenders might be less willing to even approve a loan with a high loan-to-value ratio. And so they'll expect - you know, lenders have been eroding their standards. It used to be that they wouldn't loan you for more than - a house - more than three years' income. But now typically, you know, they go up for four, five, or even eight years' income. And they're going to - they're not going to want to do this, not even regulators. If they see the market turning, they're going to get worried, too.

CONAN: What about those overall, though, sunnier demographic statistics that Lawrence Yun also talked about, the number of household formations and, indeed, the number of immigrants who will be here with documents and able to buy first houses?

Mr. SHILLER: In Irrational Exuberance, my book, I looked at demographic factors, at construction-cost factors, interest rates. I don't see that these things are really the dominate movers of the housing market, historically. They sound plausible, and they must play some role. If you look particularly at population growth, it has had none of the magnitude of the swings we've seen in house prices. It's partly because they… You know, what logically should be pushing home prices is construction costs, because the home industry can build new houses when demand goes up, and construction costs haven't been going up -you know, prices going up, relative to construction costs - which seems unstable right now.

CONAN: Well, I'm afraid we're going to have to leave it there. Christina, thanks very much for the call. Good luck to you in Sacramento.

CHRISTINA: Thank you.

CONAN: And our thanks to Robert Shiller, who's the author most recently of Irrational Exuberance, Second Edition, and he joined us from Yale University Studio in New Haven. Thanks again.

Mr. SHILLER: Okay, my pleasure.

CONAN: And our thanks to also Elizabeth Razzi, author of The Fearless Home Buyer: Razzi's Rules for Staying in Control of the Deal, and the forthcoming book, The Fearless Home Seller. It looks like you're going to have a lot of lack of fear to do that.

Ms. RAZZI: Absolutely.

CONAN: Elizabeth was here with us in Studio 3A. When we come back, the 9/11 Report, the graphic non-fiction.

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