A respected economist says the housing slump could approach or surpass levels not seen since the Depression.
NEW HAVEN, CONN. - An influential economist who long predicted the housing market bubble cautioned Tuesday that the slump in the U.S. housing market could cause prices to fall more than they did in the Great Depression and that bailouts will be needed so millions don't lose their homes.
Yale University economist Robert Shiller, pioneer of the widely watched Standard & Poor's/Case-Shiller home price index, said there's a good chance housing prices will fall further than the 30 percent drop in the historic depression of the 1930s. Home prices nationwide already have dropped 15 percent since their peak in 2006, he said.
"I think there is a scenario that they could be down substantially more," Shiller said during a speech at the New Haven Lawn Club.
Shiller's Standard & Poor's/Case-Shiller home price index is considered a strong measure of home prices because it examines price changes of the same property over time, instead of calculating a median price of homes sold during the month.
Shiller, who admitted he has a reputation for being bearish, said real estate cycles typically take years to correct.
Home prices rose about 85 percent from 1997 to 2006 adjusted for inflation, the biggest national housing boom in U.S. history, Shiller said.
"Basically we're in uncharted territory," Shiller said. "It seems we have developed a speculative culture about housing that never existed on a national basis before."
Thomas Musil, director of the Shenehon Center for Real Estate at the University of St. Thomas, said that he doubts that the housing situation will be worse than it was during the Great Depression because the fundamentals of the nation's economy and the structure of the banking system are completely different than they were during the 1930s.
"To compare any situation to the Depression is very hard to do because we're in a totally different economy and a totally different environment," he said.
Shiller endorsed legislation proposed by Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass., that would allow the Federal Housing Administration to back as much as $300 billion in mortgages for struggling homeowners. Servicers would have to agree to take a loss on the existing loans, while borrowers would have to show they could afford to make new payments on their refinanced mortgages.
On Tuesday, the National Association of Realtors said that sales of existing homes fell in March while the median home price declined to $200,700, a decline of 7.7 percent from the median price a year ago.
Sales of existing single-family homes and condominiums dropped by 2 percent in March to a seasonally adjusted annual rate of 4.93 million units.
Many analysts said they do not expect a rebound for a number of months, given the problems weighing on housing.
Staff writer Jim Buchta contributed to this report.